Case Law Details
DCIT Vs Sayaji Hotels Ltd (ITAT Ahmedabad)
ITAT Ahmedabad held that payment of interest towards ‘compromise agreement’ was not made towards any infraction of law and therefore, the same is allowable under section 37 of the Income Tax Act.
Facts- During the course of assessment, the AO disallowed a sum of Rs. 1, 62, 00, 000/- as interest on the ground that the same was penal in nature and hence not allowable under section 37 of the Act.
Based on the submissions made by the assessee, CIT(A) deleted the addition. Being aggrieved, the revenue has preferred the present appeal.
Conclusion- The assessee had entered into “compromise agreement” with Nakoda developers towards re-purchase of land sold to the said party and this “compromise agreement” was done purely to protect the business interests of the assessee. Further, we observe that the flow of transactions was on account of the business exigencies of the assessee company and the aforesaid arrangements and the consequential “compromise agreement” were done pursuant to the business exigencies of the assessee’s business. We are of the considered view that Ld. CIT(Appeals) has correctly observed that the payment of interest was not made towards any infraction of law and therefore, the same is allowable under section 37 of the Act.
When on identical facts, the Department has not made any disallowance in respect of interest payments, which the assessee has been consistently paying over a period of 10 years i.e. both in the past years as well as for the future assessment years, then the Department is precluded from making disallowance on the same set of facts in the impugned year under consideration. We observe that on identical set of facts no interest was disallowed in any of the prior or future years by the Assessing Officer. Accordingly, in light of the observations made by us in the preceding paragraphs, we are of the considered view that Ld. CIT(Appeals) has not erred in facts and in law in deleting the addition and allowing the appeal of the assessee, looking into facts of the assessee’s case.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This is an appeal filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals)-3, Vadodara, in proceeding u/s. 250 vide order dated 28/02/2018 passed for the assessment year 2014-15.
2. The Department has taken the following grounds of appeal:-
“1. On the fact and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition of Rs.1,62,00,000/- made on interest expenditure without taking note of the evident fact that the interest paid to Nakoda Developers on Rs. 20 crores @ 9 % is not allowable in view of the provisions contained in the Explaination (1) to Sec. 37(1) of the Act.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in misconstruing the compromise agreement out of the Court Order as a compulsive and necessary expense that the assessee has to incur under the definition of business transaction without taking note of the fact that the same was illegal and void transaction and cannot be described as a business expediency.
3. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary.
Relief claimed in appeal
It is prayed that the order of the CIT (Appeals) be set aside and that of the Assessing Officer be restored.”
3. The brief facts of the case are that the assessee is a company engaged in the business of hotels and restaurant. During the course of assessment, the AO disallowed a sum of Rs. 1, 62, 00, 000/- as interest on the ground that the same was penal in nature and hence not allowable under section 37 of the Act.
4. The assessee filed appeal before Ld. CIT(Appeals) in respect of the aforesaid disallowance and submitted that during the year under consideration, the assessee had debited interest of Rs. 1.6 crores payable to Nakoda developers on the amount remaining to be paid for the repurchase of party plot named Vatika belonging the assessee which was sold to Nakoda developers about 9 years earlier. The assessee company had acquired land at measuring 27,881 m2 from Indore Development Authority (IDA) on leasehold basis. A registered lease deed was executed by Indore Development Authority in favour of the assessee on 29-06-1994. The assessee constructed a 3 star hotel on this plot of land and on the land surrounding the hotel building, a party plot Vatika was developed on 2782 m2. After the passage of some years, the assessee company came under financial duress. The assessee borrowed a sum of Rs. 18.24 crores from Tourism Finance Corporation of India. Since the assessee company was under financial stress, it approached Mr Sharad Doshi, Director of Nakoda developers for financial assistance. However, to secure repayment of the loan, Mr Doshi of Nakoda developers insisted that the portion of the company’s leasehold land be made available and earmarked as security in favour of Nakoda developers and his name be added is a joint lessee in the lease deed. Accordingly, on account of such demand of Mr Doshi, the assessee approached Tourism Finance Corporation of India with the request to release a portion of land from its mortgage to enable the assessee to mortgage the same to Nakoda developers as they had promised the assessee to lend certain loan against such mortgage. The arrangement was such that the assessee entered into a sale deed with Nakoda developers for the party plot called Vatika. The assessee entered into a lease deed separately with the purchaser Nakoda developers as a result of which the possession of the plot remained with the assessee company for using it for its business purposes. The assessee submitted before Ld. CIT(Appeals) that the sale deed between the parties were not intended to be transfers of interest in a part of the land leased by Indore Development Authority but it was intended to create a security for loans advanced by Nakoda Developers to the assessee company. Thereafter, the assessee received notice dated 06-05-2010 from Indore Development Authority contending that theVikraya Lekhs (Sale Deeds) and Lease Deeds between assessee and Nakoda Developers amounted to contravention of the terms of the original lease and in the said letter they called upon the assessee to cancel such arrangements since Indore Development Authority treated the aforesaid arrangements as breach of its lease with the assessee. In view of the aforesaid notice, and after due assessment of the legal position, the assessee decided to repurchase the Vatika party plot back from Nakoda developers. For this purpose, assessee filed a civil suit in the court of law for compromise and got the re-purchase of the Vatika party done through a Court’s order in February 2011 on a compromise basis. The assessee contended that in this way the assessee protected its business interests since the possession of Vatika party plot used to bring a lot of revenue to the assessee company. As per the compromise order of the Court dated 10th February 2011, the assessee was required to pay the re-purchase price of the said party plot of Rs. 22 crores to Nakoda Developers. The assessee paid RS. 2 crores immediately and agreed to pay Rs. 20 crores subsequently. As per the Court’s order the assessee was required to pay interest on the balance amount of Rs. 20 crores which was to be paid by the assessee in the next 10 years to Nakoda Developers and till the time such principal amount is not paid, as per the order of the Court, the assessee was required to pay interest @9% on the unpaid principal amount. It was this interest amount on the unpaid principal amount of Rs. 20 crores which was disallowed by the AO during the year under consideration. The main reason cited by the AO was that since as per the Court order, it was stated that the original sale deeds of 2004 were illegal and void, the interest which the assessee paid on Rs. 20 crores @ 9% as per Courts order cannot be allowed in view of the provisions of section 37 (1) of the Act. Accordingly, the submission of the assessee before Ld. CIT(Appeals) was that the assessee never committed an offence or any act which was prohibited by any law. What the assessee did was a violation of a commercial term of the lease deed and in order to rectify the same and protect its business interests, it entered into a compromise agreement with Nakoda developers by way of a Court Order in terms of which, the land so given to Nakoda developers was repurchased back by the assessee for a consideration of Rs. 22 crores and this interest was paid only on the unpaid principal amount computed at 9% during the year under consideration.
5. The Ld. CIT(Appeals) on appreciation the facts of the instant case agreed with the contention of the assessee that the interest paid pursuant to Court decree was not towards penalty for infraction of any law, but was a purely commercial arrangement between the assessee and Nakoda developers under a civil suit, which was filed in order to protect the business interests of the assessee. Accordingly, Ld. CIT(Appeals) deleted the additions made by AO with the following observations:
“It is seen that the interest payable by the Appellant has been on the amount of the repurchase price of the Party Plot Vatika which has no connection to the so called illegal Sale Deeds. I am in agreement with the Ld. Authorized Representative that there has been no connection to the interest incurred and so called illegal Sale Deeds, and hence, the disallowance of interest is totally wrong. The Appellant’s contention has been that it has never committed an offence or any act which was prohibited by any law. What the Appellant did was a violation of a commercial term of the Lease Deed and that too when many units leased by IDA did, and the breach was only between two parties and the object of it was to save the Company’s business. Court’s reference to illegal sale deed has meant a void deed and has been for a very limited purpose. The Court has accepted that the Sales deeds and Lease deeds collectively constituted and security transactions and has stated this item in the court order which is also highlighted. The court has not said that the two Lease deeds entered into, have been illegal or are void.
3.5 As per the judgment when Rs.2 Crores were paid out of Rs. 22 Crores as payable, the same was not debited to revenue by the Appellant and similarly the remaining Rs. 20 Crores have also not been debited to revenue. The amount of Rs. 22 Crore payable has not been in any way in the form of penalty or damages. It is the repurchase price of the Vatika Plot arrived at with Nakoda Developers. As the Appellant had no money to make complete payment to the said party, it kept the balance as payable and under the terms of the court’s order, interest was paid. Sec.37(l) prescribes to disallow any payment in connection to an offence committed which generally is in the nature of penalty/damages/ additional duties or charges etc. In the Appellant’s case it is the interest paid on the amount agreed for the repurchase price of the land. As regards Explanation (1) to section 37 it is submitted that there is absolutely no question of invoking Explanation-1 to section 37 (1) in respect of payment of interest on Compromise Amount. Explanation-1 to section 37(1) reads as under:
“For removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be allowed in respect of such expenditure.”
As regards interest expenditure incurred on payment of Rs. 20 Crores in terms of order of the Court which is on COMPROMISE with the said payee namely Shree Nakoda Developers, it cannot be said by any means that such interest expenditure has been paid for an offence or is prohibited by law. On the contrary, the said interest expenditure is incurred purely for the purposes of the business so as to continue to possess, use and enjoy the impugned lease hold land which is a very attractive source of revenue to the Appellant. Any interest expenditure incurred on amount borrowed for the purpose of business and to protect the assets of the business is allowable under the provisions of section 36(l)(iii). It is submitted by the Ld. Authorized Representative that the agreement under consent terms is to secure that litigation ends and the leased plots continue to earn income as before without any interruption of anybody. He has further argued that it is not disputed by AO that the said leased plots of land was already in assessee’s possession since inception even after Vikray Lekhsie. (So called sale deeds) which was entered in to with a view of secure the loan funds received by appellant from Nakoda Developers.
3.6 Considering the aforementioned facts, detailed submissions of the appellant and the order of the court, it is observed that the Assessing Officer has ignored this vital clause of the compromise order that there was actually no safe nor lease and it was only as a security that agreement was made and hence the so called sale deed and lease deed was not effective and being void is not binding upon both sides. The AO has also ignored clause (iii) of the order on compromise agreement, in which it is stated that possession of the land covered by said Sale Deeds and said Lease deeds which is already with plaintiff, will continue to be with plaintiff. This proves beyond doubt that what was entered in to between parties was in fact deed for security purpose and not actual sale or lease deed as named in the deeds and hence what is to be seen is the substance of the agreement and not merely the names given to deeds. On this issue reference is invited to the decision of Hon’ble Apex Court in the case of Mahalakshmi Sugar Mills Co. Vs CIT [1980] 123 ITR 429 (SC) has held as under:
“We have been referred by the revenue to Mahobir Sugar Mills (P.) Ltd. vs Commissioner of Income-tax (1969) 71 Itr 87 (All) and Commissioner of Income-tax vs A.K. Das (1970) 77 Itr 31 (Cal), but in those two cases the Allahabad High Court and the Calcutta High Court respectively were concerned with a claim to deduction on account of penalty paid under $.3(5) of the Cess Act. Reliance was also placed on Commissioner of Income-tax vs Oriental Carpet Manufacturers (India) P. Ltd. (1973) 90 ITR 373. In that case, the High Court of Punjab and Haryana laid down that interest paid by an assessee on account of delay in payment of the provisional demand of tax is not a permissible deduction under s. 36(l)(iii) and s. 37 of the I. T. Act. The learned judges observed that the liability to tax, although arising out of a business activity, could not be said to be a liability related to the assessees’ business. It is not necessary for us to express any opinion on the decision. The case is distinguishable because we are concerned with a particular statutory scheme enacted in ss. 3 and 4 of the Cess Act before us. Our attention has also been invited to Saraya Sugar Mills (P.) Ltd. vs Commissioner of Income-tax (1979) 116 Itr 387, where a Full Bench of the Allahabad High Court has held that the payment of interest under s. 3(3) of the U. P. Sugarcane Purchase Tax Act, 1961, is a penal liability which accrues on an infraction of the law. Section 3(3) of the U. P. Sugarcane Purchase Tax Act, 1961, does seem to be in pari materia with s. 3(3) of the Cess Act. But we think we should resist the blandishment to sit in judgment over that decision when it is not in appeal before us. We are concerned solely with the nature of the liability to pay interest under s. 3(3) of the Cess Act. A court should be slow to succumb to the temptation of deciding questions on the construction of a statute not directly before it.
In our opinion, the interest paid under s. 3(3) of the Cess Act cannot be described as a penalty paid for an infringement of the law. As that is the only ground on which the revenue resist the claim of the assessee to a deduction of the interest under s. 10(2)(xv) the Indian I.T. Act, 1922, the assessee is entitled to succeed. There is no dispute that the payment of interest represents expenditure laid out wholly or exclusively for the purpose of the business. There is also no dispute that it is in the nature of revenue expenditure.”
The aforementioned decision of the Apex Court has a direct bearing on the present case. In view of the same and from the above discussion, it is abundantly clear that the payment of interest by the appellant cannot be treated as penal in nature and the same cannot be disallowed because it is incurred wholly and exclusively for the business purpose and it is a genuine expenditure by the appellant in the regular course of its business. Having considered the detailed facts and submissions made by the appellant, I am of the considered opinion that that the interest is compensatory and not penalty. Accordingly, the addition of Rs. 1,62,00,000/- is deleted. This Ground of the appeal is allowed.
4. The ground of appeal no. 4 of the appellant as filed along with Form 35 is as under:-
4. The Ld. AO should have considered the facts of the payments of Employees’ contribution to ESI and as the delays are very meager, he should not have added the amount to the income as otherwise the assessee has been very regular in depositing such contributions. Minor mistakes / lapses if proved genuine, should not be penalized and he should have acted in a friendly way.
4.1 The appellant has not made any submission in respect of this Ground. I am in agreement with the Assessing Officer that this issue is squarely covered by the decision of the jurisdictional Gujarat High Court in the case of CIT Vs Gujarat State Road Transport Corporation [2014] 41 taxmann.com 100 (Guj.). Hon’ble Court has decided the issue in favour of the revenue as under:-
“8. In view of the above and for the reasons stated above, and considering section 36(l)(va) of the Income Tax Act, 1961 read with sub-clause (x) of clause 24 of section 2, it is held that with respect to the sum received by the assessee from any of his employees to which provisions of sub-clause (x) of clause (24) of section (2) applies, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees’ account in the relevant fund or funds on or before the “due date” mentioned in explanation to section 36(l)(va). Consequently, it is held that the learned tribunal has erred in deleting respective disallowances being employees’ contribution to PF Account / ESI Account made by the AO as, as such, such sums were not credited by the respective assessee to the employees’ accounts in the relevant fund or funds (in the present case Provident Fund and/or ESI Fund on or before the due date as per the explanation to section 36(l)(va) of the Act i.e. date by which the concerned assessee was required as an employer to credit employees’ contribution to the employees’ account in the Provident Fund under the Provident Fund Act and/or in the ESI Fund under the RSI Act.”
The ratio of this decision is very clear and against the appellant. Respectfully following this decision, the ground of appeal of the assessee is dismissed. Thus, the appellant fails on this ground.
5.0 In result, the appeal of the appellant is partly allowed.”
6. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) allowing the assessee’s appeal. On going through the facts of the instant case, we are in agreement with the observations made by Ld. CIT(Appeals) that the aforesaid payment of interest has not been on account of any violation or infraction of law which was committed by the assessee. The assessee had entered into “compromise agreement” with Nakoda developers towards re-purchase of land sold to the said party and this “compromise agreement” was done purely to protect the business interests of the assessee. Further, we observe that the flow of transactions was on account of the business exigencies of the assessee company and the aforesaid arrangements and the consequential “compromise agreement” were done pursuant to the business exigencies of the assessee’s business. We are of the considered view that Ld. CIT(Appeals) has correctly observed that the payment of interest was not made towards any infraction of law and therefore, the same is allowable under section 37 of the Act.
7. Another notable aspect which has been brought to our notice by the counsel for the assessee during the course of hearing before us is that the assessee has been paying this interest from financial year 2011-12 and has continued to pay such interest till financial year 2021-22. The counsel for the assessee submitted that in none of the earlier or later financial years, such disallowance was made by the assessing Officer during the course of assessment proceedings in respect of such interest paid to Nakoda developers in terms of the “compromise agreement” pursuant to Court’s order. Accordingly, though the principal of Res Judicata is not applicable in income tax proceedings, but, looking into the instant facts, when on identical facts similar disallowance has not been made in any of the earlier or later years by the Department, following the principle of “consistency” as laid down by the Honourable Supreme Court in the case of Radhasoami Satsang, the Department should not disallow interest payment for this year as well. We are in agreement with the contentions put forth by the counsel for the assessee that when on identical facts, the Department has not made any disallowance in respect of interest payments, which the assessee has been consistently paying over a period of 10 years i.e. both in the past years as well as for the future assessment years, then the Department is precluded from making disallowance on the same set of facts in the impugned year under consideration. We observe that on identical set of facts no interest was disallowed in any of the prior or future years by the Assessing Officer. Accordingly, in light of the observations made by us in the preceding paragraphs, we are of the considered view that Ld. CIT(Appeals) has not erred in facts and in law in deleting the addition and allowing the appeal of the assessee, looking into facts of the assessee’s case.
8. In the result, the appeal of the Department is dismissed.
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