The State of Karnataka vs Waterfall Estate

N. Kumar, J.—These petitions are filed against the order dated 07.03.2011 passed in S.T.A. Nos. 252 and 253/2007 on the file of the Karnataka Appellate Tribunal, Bangalore allowing the appeals filed under Section 34 of Karnataka Agricultural Income Tax Act, 1957.

Even though these petitions came up for orders, by consent of the parties, it is taken up for final hearing.

The Respondent is a Partnership Firm engaged in cultivation of coffee. For the assessment year 2001-02, assessments were concluded by the Assessing Authority on 16.02.2004 levying penalty of Rs. 16,49,398/- under Karnataka Agricultural Income Tax Act (for short, ''Act'') after disallowing the claims of interest at Rs. 1,25,92,976/-. The respondent sought for rectification of the said order on the basis of the interest certificate issued by M/s. ING Vysya Bank, Chickmagalur. In the meanwhile, the order under Section 37 of the Act was passed by the Assessing Authority, on 10.12.2004 allowing the claim of interest as requested by the respondent. After obtaining the clarification from the Bank, the Assessing Authority initiated proceedings under Section 36 of the Act and disallowed the interest of Rs. 1,25,92,976/-. In appeal, the order was set aside. The matter was remanded. However, even after the remand, the same order was confirmed. The penalty was imposed under Section 22(1)(d) of the Act in a sum of Rs. 16,49,398/- on the ground that the respondent has fraudulently acted to conceal the income. Aggrieved by the said order, the assessee preferred an appeal to the Karnataka Appellate Authority. In appeal before the Karnataka Appellate Tribunal, the order passed disallowing the claim of interest was set aside and the direction was issued to consider the said claim and allow deduction. Consequently, the penalty levied was also set aside. Aggrieved by the said order, the Revenue is in revision.

We have heard the learned counsel for the parties.

This Court in the case of the assessee itself, in the case of State of Karnataka Vs. M/s. Waterfall Estate in CRP No. 164/2012 and connected matters decided on 25.03.2014 has held that the plain reading of Section 5(1)(g) to 5(1)(j) and provisions thereto makes it clear that the interest allowable under the above Section shall be actual interest paid on such loans. Hence, there is no scope for further interpretation of the word "paid" used in Section (1)(j) of the Act as deemed to have been paid in the system of accounting followed by the assessee. The assessee is not entitled to the deduction of interest.

In view of the aforesaid judgment of this Court, in the case of the assessee itself, the order passed by the Appellate Tribunal in allowing deduction of interest on the amount borrowed is erroneous in law.

In so far as levy of penalty is concerned, this Court in the case of State of karnataka vs. M/s. Blue mountain estate decided on 17.07.2014 held that the imposition of penalty is not automatic. It is for the authority to consider whether there is any justification to claim such deduction. Therefore, the impugned order passed by the Tribunal is hereby set aside upholding the levy of tax on interest by the lower authorities and remanding the matter to the assessing authority to find out in the facts of this case whether penalty is leviable. Hence, we pass the following order:-

(i) The Revision Petitions are allowed partly.

(ii) The order passed by the Tribunal allowing deduction of interest on the amount borrowed is set aside.

(iii) The order passed by the Tribunal setting aside the imposition of penalty is also set aside. However, on the question of imposition of penalty, the matter is remanded back to the assessing authority to consider the same in the light of the aforesaid judgment referred to supra.

Parties to bear their own costs.