BILL METAL INDUSTRIES LTD. V. ASSTT. COMMISSIONER OF INCOME TAX

TAXAP/28/2005

AI Insights

The case involves Bill Metal Industries Ltd., the appellant, contesting the ITAT's decision which disallowed interest expenditure claimed for the assessment years 1997-1998 and 1998-1999. The primary legal issue was whether the interest expenditure of Rs.17,57,426 for the first year and Rs.23,63,563 for the second year could be allowed as business expenditure under Section 36(1)(iii) of the Income-tax Act, 1961. The ITAT initially disallowed the claim, leading to the appeals in the Gujarat High Court. The High Court, referencing various precedents and the principle of commercial expediency, ruled in favor of the appellant, allowing the interest expenditure.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 754088 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 03-11-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-tax v. Raghuvir Synthetics Ltd., Commissioner of Income-tax-I v. Amod Stamping (P.) Ltd., S.A. Builders Ltd. v. Commissioner of Income-tax (Appeals), Chandigarh
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K M PARIKH
• Assessee Lawyers: SAURABH SOPARKAR; URVASHI SODHAN; BHOOMI THAKORE; SWATI SOPARKAR
• Keywords: Business expenditure; Closing Stock; Commercial expediency; Excise Duty; Interest Expenditure; Modvat; Non-business purpose
• Section: 43B; 36 (1) (iii); 80IA

Judgement Text

"O/TAXAP/28/2005 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 28 of 2005 With TAX APPEAL NO. 29 of 2005 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI Sd/- and HONOURABLE MR.JUSTICE K.J.THAKER Sd/- ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? NO 2 To be referred to the Reporter or not ? NO 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? NO 5 Whether it is to be circulated to the civil judge ? NO ================================================================ BILL METAL INDUSTRIES LTD.....Appellant(s) Versus ASSTT. COMMISSIONER OF INCOME TAX....Opponent(s) ================================================================ Appearance: MR SAURABH N SOPARKAR, Ld. SENIOR COUNSEL with MS URVASHI SODHAN & MS BHOOMI M THAKORE, ADVOCATES with MRS SWATI SOPARKAR, ADVOCATE for the Appellant(s) No. 1 Page 1 of 17 O/TAXAP/28/2005 JUDGMENT MR KM PARIKH, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 03/11/2014 COMMON ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. We have heard learned Counsels appearing for the respective parties. 2. The above Tax Appeals are filed by the assessee against the judgment and order of the Income Tax Appellate Tribunal (ITAT), as per the following details :- Tax Appeal ITA No. Asstt. Year 28/2005 1087/Ahd./2001 1997-1998 29/2005 3903/Ahd./2002 1998-1999 3. While admitting the matters on 05.04.2005, the following questions of law were raised for consideration of this Court :- “In Tax Appeal No.28/2005 Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that interest expenditure of Rs.17,57,426/- cannot be allowed Page 2 of 17 O/TAXAP/28/2005 JUDGMENT as business expenditure under Section 36(1)(iii) of the Income- tax Act, 1961? In Tax Appeal No.29/2005 Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that interest expenditure of Rs.23,63,563/- cannot be allowed as business expenditure under Section 36(1)(iii) of the Income- tax Act, 1961?” 4. The brief facts giving rise to the above Appeals are as under :- The assessee company is engaged in the business of manufacturing of Auto Parts. Claim u/s. 80IA In the return of income, the assessee had not claimed deduction u/s. 80IA, but during the course of assessment proceedings, a letter was submitted in which it is mentioned that the deduction u/s. 80IA may be allowed as the assessee forgot to claim deduction u/s. 80IA in the returns of Income. It was found that the issue was covered by order of Assessment Year 1996-97 in which claim of assessee for deduction u/s. 80IA was disallowed and as the legal position remained the same, Page 3 of 17 O/TAXAP/28/2005 JUDGMENT no disallowance u/s. 80IA was allowed. Set off of MODVAT against Excise Receipts In the year under consideration, the assessee collected Excise Duty with sales and against the above Excise Duty, it had set off modvat availed on purchase of raw material. In addition, the assessee purchased certain capital assets on which modvat was received and the same is set off against the excise receipts. The assessee had maintained separate account of excise. The excise collected with the sales is revenue receipt and deduction against it is allowable if the excise is actually paid or it is set off against the modvat. The modvat related to the purchase of raw material is correctly set off as the cost of raw material debited to the P&L A/c. is reduced to the extent of modvate availed on purchase of it. So far as modvat availed on purchase of capital assets is concerned, none of the item of P&L A/c. is shown at the reduced cost to the extent of modvat availed on capital assets and set off against the receipts which is in the revenue receipt. It was held that the assessee can claim set off as per excise law. Its claim in the P&L A/c or indirectly in the separate account (set off with excise receipts) is not Page 4 of 17 O/TAXAP/28/2005 JUDGMENT allowable as the modvat on capital assets is an item of capital nature. Looking to the above, set off modvat on capital goods against revenue receipt was disallowed. Under valuation of closing stock Excise duty of Rs.2,15,644/- was not added to the value of closing stock of finished goods. During the course of proceedings, it was asked as to why excise duty should not be included to the value of closing stock of finished goods as excise duty is an overhead expenditure. It was submitted that the assessee is consistently following the method in which excise duty is accounted for when it is actually paid. The excise duty was neither debited to the P&L A/c. nor it is included in the closing stock. It was found that the version of the assessee is not acceptable that excise duty is an overhead expenditure and can be included in the value of closing stock. The claim of deduction was allowable on actual payment u/s. 43B of the Act. Hence, the value of closing stock was enhanced and the addition was made to the total income. Interest for non-business purposes The assessee company is a partner in the Page 5 of 17 O/TAXAP/28/2005 JUDGMENT firm in which it had share of profit at 15% upto Assessment Year 1996-1997 and 60% in the Assessment Year 1997-1998. As a partner, the assessee had contributed fixed capital of Rs.250.01 lacs on which no interest was charged. A perusal of the details of loans and advances revealed that the assessee company had advanced Rs.2,33,35,942/- to the firm M/s. Bil Metal Works apart from interest free fixed capital of Rs.250.01 Lacs. Rs.233.35 was shown in the current account. No interest was charged on advances of Rs.233.35 Lacs also. During the course of proceedings, it was asked to submit the source of interest free advances of Rs.233.35 Lacs to M/s. Bill Metal Industries. In compliance to the above, a reply was submitted in which source of advance of Rs.233.35 lacs was given according to which all the advances were made directly from borrowed funds from Bank of Baroda and ICICI Banking Corpn. Ltd. Rs.188.59 lacs were advanced out of borrowed funds in this year and balance of Rs.44.76 Lacs were advanced in the preceding year out of borrowed funds. The assessee had claimed interest of Rs.80.68 lacs on the borrowed funds of Rs.4.55 Crores in Bank of Baroda and ICICI Page 6 of 17 O/TAXAP/28/2005 JUDGMENT Bank. During the course of proceedings, it was asked as to why interest paid on the borrowed funds should not be disallowed u/s.36(1)(ii) on the borrowed funds which are advanced for non-business purpose to the associate-concern namely Bil Metal Works. In compliance of the above, it was submitted that the assessee is having 60% share of profit in Bil Metal Works, therefore, advances given to the above firm are for business purposes. Unpaid bonus of earlier years The assessee had claimed deduction of unpaid bonus of earlier year, i.e. Assessment Year 1996-1997 to tune of Rs.1,04,716/-. Perusal of the date of payment revealed that out of claim of Rs.1,04,716/-, Rs.6,000/- is paid on 26.10.1997. It was held that deduction of liabilities of earlier years was allowable u/s.43B of the Act, if they are paid during the year under consideration. As the liability of Rs.6,000/- was not paid during the year, but was paid after close of the accounting year, the same was disallowed. Entertainment Expenses The assessee had shown entertainment Page 7 of 17 O/TAXAP/28/2005 JUDGMENT expenses. However, the plea of the assessee was not supported by any evidence. Telephone Expenses Telephone Expenses were claimed in the P&L A/c. which included the expenses incurred on the phones installed at the residence of the partners. No separate telephone is available for personal use. Since there were no separate records of personal calls and business calls, 1/8th disallowance out of telephone expenses was made which came to Rs.94,908/-. Vehicle Expenses The assessee had claimed expenses on vehicle in the shape of vehicle hire charges, vehicle maintenance expenses, repairs and dep. as well as vehicle furnishing and maintenance expenses. The partners did not have any separate vehicle for their personal purpose. No record of personal visits and business visits were maintained. In absence of the above, 1/8th disallowance out of vehicle expenses was made. Interest u/s. 201(1A) The assessee had paid TDS late to the Government A/c. Interest payable Page 8 of 17 O/TAXAP/28/2005 JUDGMENT u/s.201(1A) which came to Rs.287 and which is charged now. 5. In the above background of facts, learned Senior Counsel for the appellant Mr. Saurabh N. Soparkar has taken us to the order of the Assessing Officer as well as to the order of the Income Tax Appellate Tribunal and more particularly to Paragraph 3 of the said order which reads as under :- “The next dispute in the Appeal for A.Y. 1997-98 is with regard to the disallowance of Rs.17,57,426/- u/s. 36(1)(iii). The AO noticed that the assessee had advanced a sum of Rs.2,33,35,942/- to the firm M/s. Bill Metal Works apart from interest free fixed capital of Rs.250.01 lacs. No interest is charged on the sum so advanced and is lying in the current account. He also found that all the advances were made directly from the borrowed funds from Bank of Baroda and ICICI Banking Corporation Ltd. A sum of Rs.188.59 lacs was advanced out of borrowed funds in this year and balance of Rs.44.76 lacs were advanced in the preceding year out of the borrowed funds. The AO required the assessee to showcause as to why the interest on borrowed capital so diverted to the sister concern be not disallowed. In Page 9 of 17 O/TAXAP/28/2005 JUDGMENT response to the above, the assessee's submission was that it was having 60% share of profit in the above firm and that the advances were given for the purpose of business. The AO disagreeing with the contention of the assessee, worked out the disallowance of Rs.41,35,128 by ...” 6. Learned Senior Counsel has relied on Paragraph 8 of the said order and ultimately in Paragraph 17, it was observed as under :- “17. In these circumstances we are of the opinion that the disallowance of interest by the Departmental Authorities is not justified. The borrowed capital has been utilized for the purpose of business of the assessee or in other words for the purpose of expansion of the existing business of the assessee as the business which was being carried on by the assessee in an Industrial Undertaking belonging to the firm is being continued to be carried on by the assessee of its own. The disallowance is accordingly deleted.” It is further submitted that the Tribunal however, has taken a total u-turn, given a different finding, wrongly dismissed the Page 10 of 17 O/TAXAP/28/2005 JUDGMENT Appeals and allowed the cross-objections. Learned Senior Counsel for the appellant has further pointed out that in Paragraph 31, the Tribunal has observed as under :- “31. In view of the aforesaid, we uphold the disallowance pertaining to the advances made by the assessee to the partnership concern Bil Metal Works, as having not been incurred for the purpose of business of the assessee.” 7. Learned Senior Counsel for the appellant has taken us to the entries which are on record namely the Balance Sheet as well as the Profit and Loss Account on 31.03.1997 (of Tax Appeal No.28/2005) and also the record of Balance Sheet as on 31.03.1998 (of Tax Appeal No.29/2008). Learned Senior Counsel has also relied on the decision of this Court in the case of Commissioner of Income-tax v. Raghuvir Synthetics Ltd. reported in [2013] 354 Income Tax Reports 222. Paragraphs 9, 10 and 11 of the above judgment reads as under :- “9. We may refer to the judgment of the apex court at this stage given in case of S.A. Builders Page 11 of 17 O/TAXAP/28/2005 JUDGMENT Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC) where the question was whether interest on funds borrowed by the assessee to give an interest-free loan to sister concern should be allowed as deduction and the apex court ruled thus (pages 7 and 8) : “We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and, hence, we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct … In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the income tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest-free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expendiency... The expression 'commercial Page 12 of 17 O/TAXAP/28/2005 JUDGMENT expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency... We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 (Delhi), that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view Page 13 of 17 O/TAXAP/28/2005 JUDGMENT point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.” 10. Accordingly the question is answered in favour of the assessee by the apex court. In this tax appeal it is to be specified here that considering the material on record and keeping in view substantial interest-free funds and business expediency that the Commissioner of Income-tax (Appeals) and the Tribunal held the issue in favour of the assessee. 11. There is absolutely no perversity in such findings. On the contrary, they are conforming to the well laid down guiding principle on the subject. In the premise, the question of law needs to be answered in favour of assessee and against the Revenue. The tax appeal is dismissed accordingly and stands disposed of.” 8. Learned Senior Counsel has relied on the decision in the case of Commissioner of Income-tax-I v. Amod Stamping (P.) Ltd. Page 14 of 17 O/TAXAP/28/2005 JUDGMENT reported in [2014] 45 taxmann.com 427 (Gujarat) and the decision of the Supreme Court in the case of S.A. Builders Ltd. v. Commissioner of Income-tax (Appeals), Chandigarh reported in [2007] 288 Income Tax Reports 1 where while considering the view on deduction of interest on the capital, it was observed in Paragraphs 18, 19 and 21 as under :- “18. We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest, on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. 19. In this connection we may refer to section 36(1)(iii) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') which states that “the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession” has to be allowed as a deduction in computing the Income-tax under section 28 of the Act. 21. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income-tax authorities have approached the Page 15 of 17 O/TAXAP/28/2005 JUDGMENT matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency.” 9. On the other hand, learned Counsel for the respondent Mr. K.M. Parikh has submitted that the view taken by the Tribunal is just and proper. 10. We have heard learned Counsel appearing for both the parties. From the factual matrix and observations made by the Tribunal made in Paragraph 17 which is reproduced hereinabove, wherein the Tribunal has specifically observed that the assessee has taken loan for extension of the existing business. The Assessing Officer has wrongly disallowed the expenditure and subsequently, observations were made under misconception of the judgement of the Bombay High Court. However, in our view, all the observations made by this Court and in the judgment referred, it is not in dispute that qua the loan which was advanced, the same was taken for the extension of the business. In our view, the interest which was paid Page 16 of 17 O/TAXAP/28/2005 JUDGMENT is required to be allowed. 11. In the aforesaid circumstances, in the facts of the case, we are of the view that the Income Tax Appellate Tribunal wsa not right in taking its view and therefore, the question/s which are put for consideration are required to be answered in favour of the assessee and against the Department. Both the Tax Appeals are accordingly allowed. Sd/- (K.S. JHAVERI, J.) Sd/- (K.J. THAKER, J) CAROLINE Page 17 of 17 "