NISHOTECH SYSTEMS P.LTD, MUMBAI V. ACIT 10(3), MUMBAI

CO 143/MUM/2012

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7717 (ITAT-MUMBAI)
• Duration Of Justice: 1 month(s) 9 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 08-08-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Next Hearing Date: 26-07-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 29-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HARSHAVARDHANA DATAR
• Assessee Lawyers: AMARD EEP
• Keywords: Capital asset; Deemed dividend

Judgement Text

M/S NISHOTECH SYSTEM PVT. LTD. I.T.A.N O.6116/M/11 & CO 143/M/12 PAGE 1 OF 10 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI R.S.SYAL, ACCOUNTANT MEMBER & SHRI VIVEK VARMA, JUDICIAL MEMBER I.T.A.NO.6116/MUM/2011 (ASSESSMENT YEAR : 2008-09) ASST. COMMISSIONER OF INCOME TAX, RANGE 10(3), MUMBAI. VS. M/S NISHOTECH SYSTEMS PVT. LTD., 107, VARDHAMAN COMPLEX, FITWELL HOUSE COMPOUND, LBS MARG, VIKHROLI, MUMBAI 400 083. PAN: AAACN 2768 D (APPELLANT) (RESPONDENT) AND C.O.NO. 143/M UM/2012 (ARISING OUT OF I.T.A. NO.6116/M/11) ASS ESSMENT YEAR : 2008-09 M/S NISHOTECH SYSTEMS PVT. LTD., MUMBAI. VS. ASST. CIT, RANGE 10(3), MUMBAI. (CROSS OBJECTOR) (RESPONDENT) DEPARTMENT BY MR. AMARD EEP. RESPONDENT BY MR. HARS HAVARDHANA DATAR. DATE OF HEARING: 26-07-2012. DATE OF PRONOUNCEMENT: 08-08-2012. O R D E R PER VIVEK VARMA, JM: THE APPEAL HAS BEEN FILED BY THE DEPARTMENT AGAINS T THE ORDER OF CIT(A) 22, MUMBAI, DATED 09-06-2011. ON RECEIPT OF THE APPEAL PAPERS, THE ASS TOO FILED CROSS OBJECTIONS. FOR THE SAKE OF CONVENIENCE HAD BREVITY , WE ARE DISPOSING OFF THE APPEAL AND THE CROSS OBJECTION VIDE A COMMON ORDER. M/S NISHOTECH SYSTEM PVT. LTD. I.T.A.N O.6116/M/11 & CO 143/M/12 PAGE 2 OF 10 2. THE DEPARTMENT HAS TAKEN THE FOLLOWING GROUNDS O F APPEAL : 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN HOLDING THAT THE LOAN AMOUNT OF 1,1 9,82,954 IS NOT AN INCOME WITHIN THE MEANING OF SECTION 2(22)(E) OF THE INCOM E TAX ACT, 1961. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ASSESSEE IS NOT A BENEFICIARY OF THE TRANSACTION BETWEEN ITSELF & M/S. SANITECH ENGINEER S PVT. LTD. 3) THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED . 3. THE SOLITARY ISSUE INVOLVED IN THE EFFECTIVE GRO UNDS NO. 1 & 2 IS WITH REGARD TO THE APPLICABILITY OF SECTION 2(22)(E). 4. THE CIT(A) HAS REPRODUCED THE RELEVANT PORTIONS OF THE AOS OBSERVATIONS AND ASSESSEES SUBMISSIONS, BEFORE ARRIVING AT THE DECI SION, WHICH ARE AS UNDER: DURING THE COURSE OF ASSESSMENT PROCEEDINGS A.O., O BSERVED THAT RECEIVED ADVANCE MONEYS/UNSECURED LOANS FROM M/S. SANITECH ENGINEERI NG PVT. LTD. IN WHICH NILESH BADANI AND SANJAY BADANI, WERE HAVING 23.99% AND 20% DURING TH E YEAR. A.O. FURTHER NOTED THAT THE SHAREHOLDERS ARE ALSO HOLDING MORE THAN 10% SHAREH OLDING IN THE ASSESSEE COMPANY, WAS ALSO HAVING ACCUMULATED PROFITS DURING THE YEAR OF RS.1,09,74,931/-. ACCORDINGLY, A.O. ASKED THE ASSESSEE AS TO WHY THE AMOUNT OF UNSECURED LOAN S RECEIVED FROM THE COMPANY SHOULD NOT TREATED AS DEEMED DIVIDEND II THE HANDS OF ASSE SSEE COMPANY U/S. 2(22)(E) OF THE I.T.ACT. BEFORE A.O. THE ASSESSEE HAS FILED ITS EXP LANATION DATED 22.11.2010 WHICH HAS BEEN REPRODUCED IN ASSESSMENT ORDER IN PARA 4.2, PAGE 2 & 3. APPELLANT HAD CLAIMED THAT MONEY ADVANCED WAS FOR BUSINESS CONDITIONS FOR WHICH RELI ANCE WAS PLACED ON SEVERAL DECISIONS. A.O. ALSO NOTED THAT THE ONLY TRANSACTION WITH M/S. SANITECH ENGINEERS PVT. LTD. ARE PAYMENT OF RS.24 LAKHS ON ACCOUNT OF ENGINEERING SERVICES A ND RS.36 LAKHS TOWARDS EQUIPMENT HIRE CHARGES. A.O. ALSO NOTED THAT ASSESSEES TOTAL REVE NUE IS ONLY RS.1,93,09,058/- AND THEREFORE THERE IS NO BUSINESS TRANSACTION WITH M/S. SANITECH ENGINEERS PVT. LTD. ACCORDINGLY, A.O. REJECTED ASSESSEES CLAIM THAT LOAN AMOUNTS WERE GI VEN FOR COMMERCIAL PURPOSE OF BUSINESS IS NOT CORRECT AND IT IS AN AFTER-THOUGHT. IN VIEW OF THESE FACTS A.O. DISALLOWED RS.1,09,74,931/- U/S. 2(22)(E) OF THE ACT. 2.3 DURING THE COURSE OF APPELLATE PROCEEDINGS THE APPELLANT HAS FURNISHED WRITTEN SUBMISSIONS, THE RELEVANT PART OF WHICH IS AS UNDER : 1. THIS GROUND IS AGAINST THE ADDITION ON ACCOUNT O F DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE COMPANY. ON THE PAGE 2 OF THE ASSESSMENT O RDER THE LD. ASSESSING OFFICER HAS GIVEN THE FINDING THAT A. MR. NILESH BADANI AND MR. SANJAY BADAN I WAS HOLDING OF 23.99% AND 20.00% RESPECTIVELY IN M/S NISHOTECH SYSTEMS PRIVATE LIMIT ED AND BOTH OF THEM WERE HOLDING MORE THAN 10% SHAREHOLDING IN M/S SANITECH ENGINEERING P RIVATE LIMITED. B. ASSESSEE HAD SOME AMOUNT PAYABLE TO M/S SANITECH SYSTEM PRIVATE LIMITED WHICH HAS BEEN TERMED AS LOAN BY LD. ASSESSING OFFICER TO THE EXTENT OF RS. 1,09,74,931/- C. THE SAID AMOUNT IS TREATED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE COMPANY. 2. THE ASSESSEE HAD SUBMITTED SHAREHOLDERS LIST WIT H LD. ASSESSING OFFICER WHICH IS PRODUCED BEFORE YOUR HONOUR FOR PERUSAL. IT WOULD BE IMPERAT IVE TO NOTE FROM IT THAT NEITHER M/S NISHOTECH SYSTEMS PRIVATE LIMITED, TO WHOM AMOUNT W AS PAYABLE BY M/S NISHOTECH SYSTEMS PRIVATE LIMITED IS SHAREHOLDER OF EACH OTHERS. 3. ASSESSEE CONTENDS THAT SINCE ASSESSEE IS NOT SHA REHOLDER, THERE CANNOT BE ANY DIVIDEND IN THE HANDS OF THE ASSESSEE. M/S NISHOTECH SYSTEM PVT. LTD. I.T.A.N O.6116/M/11 & CO 143/M/12 PAGE 3 OF 10 4. ASSESSEES CONTENTION IS SQUARELY COVERED BY SPE CIAL BENCH DECISION OF MUMBAI ITAT IN MATTER OF ACIT V. BHAUMIK COLOUR PVT. LTD (2009) 11 8 LTD 1 ON WHICH RELIANCE IS PLACED. IT HAS BEEN HELD THAT THE INTENTION BEHIND ENACTING PROVISIONS OF SECTION 2(22) (E) ARE THAT CLOSELY HELD COMPANIES (I.E., COMPANIES IN WHICH PUBLIC ARE NOT SUBSTANTIA LLY INTERESTED), WHICH ARE CONTROLLED BY A GROUP OF MEMBERS, EVEN THOUGH THE COMPANY HAS ACCUM ULATED PROFITS WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND BECAUSE IF SO DISTRIBUTED T HE DIVIDEND INCOME WOULD BECOME TAXABLE IN THE HANDS OF THE SHAREHOLDERS. INSTEAD OF DISTRIBUT ING ACCUMULATED PROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS LOAN OR ADVANCES TO SH AREHOLDERS OR TO CONCERN IN WHICH SUCH SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT, BY T HE DEEMING PROVISIONS SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION B EHIND THE PROVISIONS OF SECTION 2(22) (E) IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDER. THE DEEMING PROVISIONS AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE INTENTION OF THE LEGISLATURE IS, THEREFORE, TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE CONCERN. 5. IN THE SUBMISSIONS BEFORE THE CIT(A), THE ASSESS EE PLACED RELIANCE ON A NUMBER OF JUDICIAL PRONOUNCEMENTS. CONSIDERING ALL THESE FACTS, THE CIT(A) OBSERVED AS UNDER: I HAVE GONE THROUGH THE ASSESSMENT ORDER, PERUSED THE SUBMISSIONS MADE BY THE APPELLANT AND ALSO DISCUSSED THE CASE WITH THE AJR OF THE APPELLANT. A.O. DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT ASSESSE E HAS TAKEN LOAN FROM M/S. SANITECH ENGINEERS PVT. LTD. IN WHICH SHRI NILESH B ADANI AND SANJAY BADANI ARE HOLDING 23.99% AND 20% SHAREHOLDING. THESE TWO SHAR EHOLDERS ARE ALSO HOLDING MORE THAN 10% SHAREHOLDING IN ASSESSEE COMPANY AND THE LENDER COMPANY IS HAVING ACCUMULATED PROFIT DURING THE YEAR. A.O. INTENDED T O INVOKE THE PROVISION OF SECTION 2(22)(E) IN RESPONSE TO WHICH THE APPELLANT EXPLAIN ED BEFORE A.O. THAT BOTH THESE COMPANIES ARE SUPPORTING EACH OTHER AND HENCE THEY EXTEND FINANCIAL SUPPORT TO EACH OTHER. IT WAS ACCORDINGLY ARGUED THAT SINCE TH EY GIVE FINANCIAL SUPPORT, BORROWING AND LENDING BETWEEN THESE TWO COMPANIES O F THE AMOUNT TAKEN DOESNT BEAR THE CHARACTERISTIC OF LOANS AND ADVANCES AS PE R STRICT INTERPRETATION OF SECTION 2(22)(E). IT WAS ALSO SUBMITTED THAT M/S. SANITECH ENGINEERS PVT. I.E. LENDER COMPANY HAD NOT MADE PAYMENT TO THE ASSESSEE COMPAN Y FOR INDIVIDUAL BENEFIT OF TWO SHAREHOLDERS. IT WAS ACCORDINGLY ARGUED THAT TH E INTENTION OF MONEY WAS FOR COMMERCIAL PURPOSE AND NOT FOR INDIVIDUAL BENEFIT O F THE SHAREHOLDER. RELIANCE WAS ALSO PLACED ON HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS. NAGIN M. KAPAID, 177 ITR 393 AND HONBLE DELHI HIGH COURT IN CIT VS. CRE ATING DYING & PAINTING PVT. LTD. THE A.O. HOWEVER DID NOT AGREE WITH THIS ARGUMENT O N THE GROUND THAT THE ONLY BUSINESS TRANSACTION WITH M/S. SANITECH ENGINEERS P VT. IS PAYMENT OF RS.24 LACS ON ACCOUNT OF ENGINEERING SERVICES AND RS.36 LACS TOWA RDS HIRE CHARGES AND HENCE THE CLAIM OF APPELLANT THAT LOAN WAS GIVEN FOR COMMERCI AL PURPOSE IS NOT CORRECT AND IS AN AFTER THOUGHT. DURING THE COURSE OF APPELLATE PR OCEEDINGS IT WAS SUBMITTED BEFORE ME THAT THE APPELLANT HAD SUBMITTED LIST OF SHAREHO LDERS TO THE A.O. WHICH HAS BEEN REFERRED TO BY HIM IN PARA 4.1 & 4.2. OF THE ASSESS MENT ORDER. FROM THE SAID LIST IT MAY BE NOTED THAT THE APPELLANT COMPANY IS NOT A SH AREHOLDER IN M/S. SANITECH ENGINEERS PVT. LTD. BUT ADVANCED THE LOAN OF RS. 1. 19 CRORES. RELYING UPON THE JUDGEMENT OF HONBLE ITAT IN ACIT VS. BHAUMIK COLOU R PVT. LTD. (2009 118 ITD 1 IT WAS STATED THAT THE PROVISION REGARDING DEEMED DIVI DEND U/S.2(22)(E) CANNOT BE INVOKED WHERE THE LOAN IS GIVEN TO NON SHAREHOLDER. APPELLANT HAS ALSO FURNISHED M/S NISHOTECH SYSTEM PVT. LTD. I.T.A.N O.6116/M/11 & CO 143/M/12 PAGE 4 OF 10 PARAWISE COMPARISON OF FACTS OF ITS CASE TO THAT OF BHAUMIK COLOUR PVT. LTD. RELIANCE IS ALSO PLACED ON THE JUDGEMENT OF HONBLE BOMBAY H IGH COURT IN CASE OF CIT VS. UNIVERSAL MEDICARE PVT. LTD. 190 TAXMAN 144, GIVING PARAWISE COMPARISON OF THE TWO CASES. THE APPELLANT HAS ALSO RELIED UPON THE J UDGEMENT DELHI HIGH COURT IN CIT VS. ANKITECH PVT. LTD. AND OF RAJASTHAN HIGH HOTEL HILLTOP, 313 ITR 116. THE FACTS OF THE CASE HAVE BEEN ANALIZED AND IT IS NOTED THAT TH E CONTENTION OF THE APPELLANT THAT IT IS NOT A SHAREHOLDER IN THE LENDER COMPANY I.E. M/S. SANITECH ENGINEERS PVT. LTD. IS CORRECT. THE A.O. HAS NOT DISPUTED THIS FACT IN THE ASSESSMENT ORDER HENCE THE DECISION OF HON'BLE ITAT, MUMBAI IN BHAUMIK COLOUR PVT. LTD. SQUARELY APPLIES TO THE FACTS OF THE APPELLANT CASE WHEREIN THE HON'BLE ITA T OBSERVED AS UNDER: THE INTENTION BEHIND THE PROVISIONS OF S. 2(22)(E) IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDER. THE DEEMING PROVISION AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST IS BASED ON THE PRESUMPTION THAT THE LOAN OR ADVANCES WOULD ULT IMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVA NCE. THE INTENTION OF THE LEGISLATURE IS THEREFORE TO TAX DIVIDEND ONLY IN TH E HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE CONCERN. THE BASIS OF BRINGING IN THE AMENDMENT TO S. 2(22)(E) BY THE FINANCE ACT, 1987, W.E.F 1ST APRIL, 1988 IS TO ENSURE THAT PERSONS WHO CONTROL THE AFFAIRS OF A COMPANY AS WELL AS THAT OF A FIRM CAN HAVE THE PAYMENT MADE TO A CONCERN FROM THE COMPANY AND THE PERSON WHO CAN CON TROL THE AFFAIRS OF THE CONCERN CAN DRAW THE SAME FROM THE CONCERN INSTEAD OF THE C OMPANY DIRECTLY MAKING PAYMENT TO THE SHAREHOLDER AS DIVIDEND. THE SOURCE OF POWER TO CONTROL THE AFFAIRS OF THE COMPANY AND THE CONCERN IS THE BASIS ON WHICH T HESE PROVISIONS HAVE BEEN MADE. IT IS THEREFORE PROPER TO CONSTRUE THOSE PROV ISIONS AS CONTEMPLATING A CHARGE TO LAX IN THE HANDS OF THE SHAREHOLDER AND NOT IN T HE HANDS OF A NON- SHAREHOLDER VIZ., CONCERN. A LOAN OR ADVANCE RECEIVED BY A CONC ERN IS NOT IN THE NATURE OF INCOME. IN OTHER WORDS THERE IS A ACCRUAL OF INCOM E EVEN UNDER S. S(1)(B) IN THE HANDS OF THE SHAREHOLDER ONLY AND NOT IN THE HANDS OF THE PAYEE VIZ., NON- SHAREHOLDER (CONCERN). SEC. 5A,)A,) CONTEMPLATES T HAT THE RECEIPT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF INCOME. THEREFORE, THE D EEMING FICTION CAN BE APPLIED ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT THE NO N-SHAREHOLDER VIZ., THE CONCERN. CBDT CIRCULAR NO. 495, DT. 22ND SEPT., 1987, TO THE EXTENT NOT BENEVOLENT IS NOT BINDING. IN THE EVENT OF THE PAYMENT OF LOAN OR ADV ANCE BY A COMPANY. TO A CONCERN BEING TREATED AS DIVIDEND AND TAXED IN THE HANDS -O F THE CONCERN THEN, THE BENEFIT OF SET OFF AS PER S. 2(22) (E) (III) CANNOT BE ALLOWED TO THE CONCERN, BECAUSE THE CONCERN CAN NEVER RECEIVE DIVIDEND FROM THE COMPANY WHICH I S ONLY PAID TO THE SHAREHOLDER, WHO HAS SUBSTANTIAL INTEREST IN THE CONCERN. THE PR OVISIONS OF SUB-CL. (III) OF S. 2(22)(E) ALSO THEREFORE CONTEMPLATE DEEMED DIVIDEND BEING TAXED IN THE HANDS OF A SHAREHOLDER ONLY. CIT VS. HOTEL HILLTOP (2008) 217 CTR (RAJ) 527FOLLOWED. FURTHER IN A RECENT JUDGEMENT DATED 22.03.2010 IN C ASE OF CIT VS. UNIVERSAL MEDICARE 190 TAXMAN 144, HONBLE BOMBAY HIGH COURT WHILE DECIDING THE CASE ON FACTS HAVE OBSERVED AS UNDER: CONSEQUENTLY, THE EFFECT OF CLAUSE (E) OF SECTION 2(22) IS TO BROADEN THE AMBIT OF THE EXPRESSION DIVIDEND BY INCLUDING CERTAIN PAYM ENTS WHICH THE COMPANY HAS MADE BY WAY OF A LOAN OR ADVANCE OR PAYMENTS MADE O N BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF A SHAREHOLDER. THE DEFINITION DOES HOT ALTER THE LEGAL POSITION THAT DIVIDEND HAS TO BE TAXED IN THE HANDS OF THE S HAREHOLDER. CONSEQUENTLY IN THE PRESENT CASE THE PAYMENT, EVEN ASSUMING THAT IT WAS A DIVIDEND, WOULD HAVE TO BE TAXED NOT IN THE HANDS OF THE ASSESSEE BUT IN THE H ANDS OF THE SHAREHOLDER. RESPECTFULLY FOLLOWING THE ABOVE CASE LAWS, THE A.O . IS DIRECTED TO DELETE THE ADDITION OFRS.1,09,74,931/- MADE ULS.2(22)(E) OF I.T.ACT. 6. AGAINST THIS DECISION, THE DEPARTMENT IS IN APPE AL BEFORE THE ITAT. M/S NISHOTECH SYSTEM PVT. LTD. I.T.A.N O.6116/M/11 & CO 143/M/12 PAGE 5 OF 10 7. BEFORE US, THE DR CONCEDED THAT THE FACTS INVOLV ED IN IMPUGNED ISSUE ARE COVERED BY THE DECISION OF SPECIAL BENCH OF THE TRI BUNAL IN THE CASE OF BHAUMIK COLOUR PVT. LTD. (SUPRA) AND ALSO BY THE HON'BLE JURISDICTIONAL HIGH COURT AT BOMBAY IN THE CASE OF CIT V/S UNIVERSAL MEDICARE (P) LTD. (SUPRA). 8. THE AUTHORISED REPRESENTATIVE, RELIED ON THE ORD ERS PASSED BY THE CIT(A). 9. SINCE THE DR HAS HIMSELF CONCEDED THE ISSUE AND RESPECTFULLY RELYING UPON THE DECISIONS AS CITED BY THE CIT(A) IN HIS DECISION, W E DO NOT FIND ANY REASON TO DISTURB THE FINDINGS AND DECISION ARRIVED AT BY THE CIT(A). WE SUSTAIN THE ORDER OF THE CIT(A) ON THIS ISSUE AND REJECT THE GROUNDS OF APPE AL, AS FILED BY THE DEPARTMENT. 10. C.O. NO. 143/MUM/12 : ASSESSEE HAS PREFERRED THE FOLLOWING GROUNDS IN THE CROSS OBJECTION FILED BY IT : 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND J UDICIAL PROPOSITION, HONBLE CIT(APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE M ADE BY LD. ASSESSING OFFICER ON ACCOUNT OF TRAVELLING EXPENSES OF RS.6,97,974/- WHI CH IS BAD IN LAW AND DEVOID OF FACTUAL AND LEGAL MERITS AND HENCE LIABLE TO BE DEL ETED. 2. WITHOUT PREJUDICE TO ABOVE, ON THE FACTS AND CIR CUMSTANCES OF THE CASE AND JUDICIAL PROPOSITION, HONBLE CIT(APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY LD. ASSESSING OFFICER ON ACCOUNT OF TRAVELLING E XPENSES OF RS.6,97,974/- WHICH IS BAD IN LAW AND DEVOID OF FACTUAL AND LEGAL MERITS A ND HENCE LIABLE TO BE REDUCED. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND J UDICIAL PROPOSITION, HONBLE CIT(APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE B Y TREATING THE SAME AS CAPITAL IN NATURE WHICH IS MADE BY LD. ASSESSING OFFICER ON AC COUNT OF INTEREST AT THE RATE OF 8H ON INTEREST PAYMENT WHICH WORKED OUT TO RS.9,47 ,708/- WHICH IS BAD IN LAW AND DEVOID OF FACTUAL AND LEGAL MERITS AND HENCE LIABLE TO BE DELETED. 4. WITHOUT PREJUDICE TO ABOVE, ON THE FACTS AND CIR CUMSTANCES OF THE CASE AND JUDICIAL PROPOSITION, HONBLE CIT(APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE BY TREATING THE SAME AS CAPITAL IN NATURE WHICH IS MAD E BY LD. ASSESSING OFFICER ON ACCOUNT OF INTEREST AT THE RATE OF 8% ON INTEREST P AYMENT WHICH WORKED OUT TO RS.9,47,708/- WHICH IS BAD IN LAW AND DEVOID OF FAC TUAL AND LEGAL MERITS AND HENCE LIABLE TO BE REDUCED. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND O N JUDICIAL PROPOSITION, LD. ASSESSING OFFICER ERRED IN FILING THE APPEAL AT HON BLE ITAT AND ASSESSEE PRAYS THAT SUITABLE COSTS SHOULD BE AWARDED TO THE ASSESSEE. 11. GROUNDS NO. 1 & 2 PERTAIN TO DISALLOWANCE OF TR AVELLING EXPENSES OF RS. 6,97,974/-. THE ASSESSEE HAD DEBITED RS. 69,79,740/ - UNDER THE HEAD TRAVELLING EXPENSES, THE AO FOUND THAT THE EXPENSES HAD BEEN I NCURRED IN THE NAMES OF M/S NISHOTECH SYSTEM PVT. LTD. I.T.A.N O.6116/M/11 & CO 143/M/12 PAGE 6 OF 10 DIRECTORS AND MAINLY IN CASH. THE AO, THEREFORE, DI SALLOWED 10% OUT OF THESE EXPENSES, HOLDING THAT IT CANNOT BE VERIFIED THAT T HE EXPENSES WERE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 12. THE CIT(A), SUSTAINED THE DISALLOWANCE, HOLDING THAT THE APPELLANT HAD FAILED TO REBUT THE FINDINGS OF THE AO. 13. AGGRIEVED, THE ASSESSEE IS NOW BEFORE THE ITAT. 14. WE HAVE HEARD THE ARGUMENTS AND HAVE GONE THROU GH THE RECORDS, WE FIND THAT THE ASSESSEE IS A COMPANY, WHICH IS A SEPARATE PERSON, DISTINCT FROM ITS EMPLOYEES, WHICH INCLUDES DIRECTORS. ONCE THE EXPEN SE IS INCURRED IN THE ORDINARY COURSE OF BUSINESS, IT HAS TO BE ALLOWED. THE ISSUE , WHETHER IT IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, HAS TO BE GAUGED ONLY FROM THE EYES OF THE ASSESSEE, WHO IN THE INSTANT CASE IS A COMPANY. THE ASSESSEE, DURING APPELLATE PROCEEDINGS PLACED RELIANCE ON THE DECISION OF DCIT V/S HARYANA OXYGEN LTD. REPORTED IN 76 ITD 32 (DEL); ITO V/S ASHOKA BETELNU T CO. LTD. REPORTED IN 21 TTJ 465 (MAD) AND DAKS COPY SERVICE (P) V/S ITO REPORTE D IN 34 TTJ 604 (MUM-S.B); SAYAJI IRON & ENGG. CO. V/S CIT, REPORTED IN 253 IT R 749 (GUJ). 15. IN ALL THESE FACES, WE FIND THAT A COMPLETE DIS TINCTION HAS BEEN DRAWN BETWEEN THE COMPANY AND ITS DIRECTORS. LOOKING AT T HE ISSUE FROM THE ASSESSEES POINT OF VIEW, ONCE AN EXPENSE HAS BEEN INCURRED AN D BOOKED IN BOOKS OF ACCOUNTS, IT PERTAINS TO THE COMPANY/S EXPENSE AND WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE COMPANY, SUBJECT TO BEING PROVED OT HERWISE, WHERE THE ONUS IS HEAVILY PLACED ON THE REVENUE TO PROVE THAT THE EXP ENSE HAS BEEN INCURRED WHICH IS NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSIN ESS. MERELY AND LAMELY OBSERVING THAT THE EXPENSE IS NOT EXCLUSIVELY AND WHOLLY FOR THE PURPOSE OF BUSINESS IS JUST NOT M/S NISHOTECH SYSTEM PVT. LTD. I.T.A.N O.6116/M/11 & CO 143/M/12 PAGE 7 OF 10 GOOD ENOUGH FOR US TO TAKE A SERIOUS NOTE OF, SPECI ALLY WHEN THERE ARE CITED CASES, WHICH ARE SO HEAVILY PLACED IN FAVOUR OF THE ASSESS EE. 16. RESPECTFULLY FOLLOWING THE CASES AS CITED BY TH E ASSESSEE COMPANY, WE SET ASIDE THE ORDER OF CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THE DISALLOWANCE OF EXPENSES OF RS. 6,97,974/-. 17. GROUNDS NOS. 3 & 4 ARE DISALLOWANCE OF RS. 9,47 ,708/- BEING 8% OF INTEREST DEBITED TO THE BOOKS. 18. DURING THE ASSESSMENT PROCEEDINGS, THE AO NOTIC ED THAT RS. 1,20,58,859/- HAD BEEN INCURRED BY THE ASSESSEE UNDER THE HEAD FA CTORY BUILDING CONSTRUCTION. THE AO, THEREFORE ASKED AS TO WHY THE PROPORTIONATE EXP ENSE NOT BE CAPITALISED. THE AO AFTER CONSIDERING THE REPLY OF THE ASSESSEE, DISALL OWED 8% OF THE TOTAL INTEREST DEBITED TO THE PROFIT & LOSS ACCOUNT. THE CIT(A) AL SO SUSTAINED THE ADDITION MADE BY THE AO. 19. AGGRIEVED, THE ASSESSEE IS BEFORE THE ITAT. 20. BEFORE US, THE A.R. APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE ENTIRE BORROWED FUNDS, TO THE TUNE OF RS. 4,35,43,6 81/- PERTAIN TO WORKING CAPITAL AND BESIDES THIS THE OVERALL FUND POSITION OF THE A SSESSEE COMPANY WAS QUITE HEALTHY, AS IT HAD SHAREHOLDERS FUNDS OF RS. 3,60, 57,975/- WHICH INCLUDE RS. 3,09,57,975/- AS RESERVE AND SURPLUS AND CURRENT YE ARS PROFIT AT RS. 1,97,51,324/-, BESIDES HAVING DEBTORS AT RS. 8,57,94,349/-. THE A. R. POINTED OUT THAT, IN ANY CASE, THE FACTORY BUILDING UNDER CONSTRUCTION IS COMING F ROM THE PRECEDING YEAR, WHERE NO SUCH DISALLOWANCE WAS MADE BY THE DEPARTMENT. THE A .R. POINTED OUT THAT DISALLOWANCE COULD HAVE BEEN ACCEPTABLE HAD INTERES T BEARING FUNDS WERE BEING UTILISED FOR NON COMMERCIAL PURPOSE. HERE IN THIS C ASE, THE ENTIRE LOAN IS WORKING CAPITAL LOAN AND IN ANY CASE THE ASSESSEE WAS HAVIN G SUBSTANTIAL OWN FUNDS, FROM M/S NISHOTECH SYSTEM PVT. LTD. I.T.A.N O.6116/M/11 & CO 143/M/12 PAGE 8 OF 10 WHICH THE CONSTRUCTION WAS BEING CARRIED ON. HE PLA CED HEAVY RELIANCE ON THE DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V/S VARDHMAN POLYSTER LTD., REPORTED IN 288 ITR 152 (P&B-FB) AND ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF DCIT V/S LOU HEALTH CA RE LTD. REPORTED IN 167 TAXMAN 206 (S.C), WHEREIN THE HON'BLE SUPREME COURT HELD, A PROVISO HAS SINCE BEEN INSERTED IN SECTION 36(1 )(III). THAT PROVISO HAS BEEN INSERTED BY THE FINANCE ACT, 2003 WITH EFFECT FROM 1-4-2004. HENCE, THE SAID PROVISO WILL NOT APPLY TO THE FACTS OF THE INSTANT CASE. FURTHER, THE SAID PROVISO WOULD OPERATE PROSPECTIVELY. IN THIS CONNECTION, IT MAY BE NOTED THAT BY THE SAME FINANCE ACT, 2003, INSERTIONS HAVE BEEN MADE BY WAY OF PROVISO IN SECTION 36(I)(VIIA ), WHICH IS MADE EFFECTIVE FROM 1-4-2004 . SAME IS THE POSITION WITH REGARD TO INSERTION OF A SUB-SECTION AFTER SECTION 90(2). THIS INSERTION ALSO OPERATES WITH EFFECT FROM 1-4- 2004. IN SHORT, THE ABOVE AME NDMENTS HAVE BEEN MADE BY THE FINANCE ACT, 2003 AND HAVE BEEN MADE OPERATIONA L WITH EFFECT FROM 1-4-2004. THEREFORE, THE PROVISO INSERTED IN SECTION 36L)(II I ) HAS TO BE READ AS PROSPECTIVELY AND WITH EFFECT FROM 1-4 -2004. IN THIS CASE, THE L AW CONCERNED WAS AS IT EXISTED PRIOR TO 1-4-2004. [PARA 11]. SECTION 36(L)( III) HAS TO BE READ ON ITS OWN TERMS . IT IS A CODE BY ITSELF. SECTION 36(1)(III) IS ATTRACTED WHEN THE ASSESSEE BORROWS T HE CAPITAL FOR THE PURPOSE OF HIS BUSINESS. IT DOES NOT MATTER WHETHER THE CAPITAL IS BORROWED IN ORDER TO ACQUIRE A REVENUE ASSET OR A CAPITAL ASSET, BECAUSE A/L THAT THE SECTION REQUIRES IS THAT THE ASSESSEE MUST BORROW THE CAPITAL FOR THE PURPOSE OF HIS BUSINESS. THIS DICHOTOMY BETWEEN THE BORROWING OF A LOAN AND ACTUAL APPLICAT ION THEREOF IN THE PURCHASE OF A CAPITAL ASSET, SEEMS TO PROCEED ON THE BASIS THAT A MERE TRANSACTION OF BORROWING DOES NOT, BY ITSELF, BRING ANY NEW ASSET OF AN ENDU RING NATURE INTO EXISTENCE, AND THAT IT IS THE TRANSACTION OF IN VESTMENT OF THE BO RROWED CAPITAL FOR THE PURCHASE OF A NEW ASSET WHICH BRINGS THAT ASSET INTO EXISTENCE. THE TRANSACTION OF BORROWING IS NOT THE SAME AS THE TRANSACTION OF INVESTMENT. IF T HIS DICHOTOMY IS KEPT IN MIND IT BECOMES CLEAR THAT THE TRANSACT/ON OF BORROWING ATT RACTS THE PROVISIONS OF SECTION 36(1)(III). [PARA 13]. THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING D ISALLOWANCE OF INTEREST IN RESPECT OF BORROWINGS UTILIZED FOR PURCHASE OF MACHINERY. THE A.R. CONCLUDED THAT THE CIRCUMSTANCES DO NOT ME RIT ANY DISALLOWANCE. 21. THE DR ON THE OTHER HAND SUBMITTED THAT THE DIS ALLOWANCE WAS VERY REASONABLE AND RIGHTLY MADE BECAUSE, THE ASSESSEE D ID NOT HAVE ANY LIQUID FUNDS WITH IT AND THAT THE CASE LAWS RELIED UPON BY THE A SSESSEE WERE DISTINGUISHABLE ON FACTS. HE, THUS, RELIED UPON THE DECISION OF THE RE VENUE AUTHORITIES. 22. WE HAVE HEARD THE RIVAL CONTENTIONS AND HAVE PE RUSED THE MATERIAL ON RECORD. WE FIND THAT THE FACTS AS CITED BY THE A.R. ARE SELF EXPLANATORY IN SO FAR AS M/S NISHOTECH SYSTEM PVT. LTD. I.T.A.N O.6116/M/11 & CO 143/M/12 PAGE 9 OF 10 THE ISSUE OF DISALLOWANCE U/S 36(1)(III) IS CONCERN ED. WE HAVE SEEN FROM THE BALANCE-SHEET, THAT THE ARGUMENT OF THE DR CANNOT B E RELIED UPON, WHEN HE SAYS THAT THE ASSESSEE HAD NO LIQUID FUNDS, IN FACT, WHA T THE ASSESSEE HAS SHOWN IN ITS BALANCE-SHEET, IS THAT IT HAD CASH AND BALANCE AT R S. 1.23 CRORES, WHEREAS THE CONSTRUCTION ACTIVITY CARRIED ON BY THE ASSESSEE WA S AT RS. 1.20 CRORES. THIS, FACT, BY ITSELF PROVES THAT THE ASSESSEE HAD ENOUGH CASH WIT H ITSELF, BESIDES OTHER NON INTEREST BEARING FUNDS AVAILABLE WITH IT. 23. ON THESE FACTUAL CIRCUMSTANCES AND RELYING UPON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF HEALTH CARE LTD. (SUPRA) AS WELL AS THE DECISION OF JURISDICTIONAL HIGH COURT AT BOMBAY IN CIT VS. RELI ANCE UTILITIES & POWERS LTD. REPORTED IN 313 ITR 340 (BOM), WE ARE OF THE OPINIO N THAT THE REVENUE AUTHORITIES ERRED IN MAKING A DISALLOWANCE OF RS. 9,47,708/-. 24. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A ) ON THIS ISSUE AND DIRECT THE AO TO DELETE THE DISALLOWANCE OF RS. 9,47,708/-. TH E CROSS OBJECTION IS ALLOWED. IN THE RESULT: 25. IN THE RESULT : I.T.A. NO. 6116/MUM/2011 BY THE DEPARTMENT IS DISM ISSED. C.O.NO. 143/MUM/2011 BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 0 8/08/2012. SD/- SD/- (R.S.SYAL) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICI AL MEMBER MUMBAI: 2012. P/-* M/S NISHOTECH SYSTEM PVT. 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