M/s. Texonic Instruments, CHENNAI V. ACIT, CHENNAI

CO 34/CHNY/2012

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7362 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 20 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 19-07-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 04-07-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 29-02-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: N DEVANATHAN
• Keywords: Rule of consistency; Fair market value; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NO. 307/MDS/2012 (ASSESSMENT YEAR : 2008-09) THE ASSISTANT COMMISSIONER OF INCOME TAX, BUSINESS CIRCLE VII, CHENNAI - 600 034 . (APPELLANT) V. M/S TEXONIC INSTRUMENTS, NO.9, ATHIPATTAN STREET, MOUNT ROAD, CHENNAI - 600 002. PAN : AAAFT1650M (RESPONDENT) C.O. NO. 34/MDS/2012 (IN I.T.A. NO. 307/MDS/2012) (ASSESSMENT YEAR : 2008-09) M/S TEXONIC INSTRUMENTS, NO.9, ATHIPATTAN STREET, MOUNT ROAD, CHENNAI - 600 002. (CROSS OBJECTOR) V. THE ASSISTANT COMMISSIONER OF INCOME TAX, BUSINESS CIRCLE VII, CHENNAI - 600 034 . (RESPONDENT) REVENUE BY : SHRI SHAJI P. JACOB, ADDL. CIT ASSESSEE BY : SHRI N. DEVANATHAN, ADVOCATE DATE OF HEARING : 4.7.2012 DATE OF PRONOUNCEMENT : O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEAL AND CROSS-OBJECTION FILED BY THE REVENUE AND ASSESSEE RESPECTIVELY, FOR THE IMPUGNED ASSESSM ENT YEAR, I.T.A. NO. 307/MDS/12 C.O. NO. 34/MDS/12 2 DIRECTED AGAINST ORDER DATED 28.11.2011 OF COMMISSI ONER OF INCOME TAX (APPEALS)-IX, CHENNAI. GRIEVANCE OF THE REVENU E IN ITS APPEAL IS THAT CIT(APPEALS) DELETED A DISALLOWANCE OF ` 16,58,713/- MADE BY THE A.O. AGAINST THE CLAIM OF INTEREST EXPENDITURE. ASSESSEE IN ITS CROSS-OBJECTION SUPPORTS THE ORDER OF CIT(APPEALS). 2. SHORT FACTS APROPOS ARE THAT ASSESSEE, ENGAGED I N THE BUSINESS OF COMPUTER PERIPHERAL TRADING, FILED ITS RETURN FO R THE IMPUGNED ASSESSMENT YEAR ON 14.9.2009, ADMITTING AN INCOME O F ` 67,19,190/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESS ING OFFICER NOTED THAT THE ASSESSEE HAD CLAIMED ` 42,65,261/- AS INTEREST PAID TO LOAN CREDITORS. AS PER THE A.O., LOAN CREDITORS WE RE ALL RELATIVES OF THE ASSESSEE AND INTERESTS WERE PAID AT THE RATE OF 18% PER ANNUM. AGAINST THIS, LOANS WERE GIVEN BY THE ASSESSEE TO C ERTAIN PARTIES WHO WERE NOT RELATIVES, AND IT WAS GETTING AN INTEREST OF ONLY 11% PER ANNUM. IN ONE CASE, INTEREST WAS ONLY 10%, WHEREAS , IN TWO OTHER CASES, NO INTEREST WHATSOEVER WAS RECEIVED. PARTY FROM WHOM ASSESSEE WAS GETTING 11% INTEREST WAS M/S KHIVRAJ M OTORS AND THE PARTY FROM WHOM THE ASSESSEE WAS GETTING INTEREST A T 10% WAS M/S MARDIA METAL INDUSTRIES. NO INTERESTS WERE RECEIVE D ON AMOUNTS GIVEN BY THE ASSESSEE TO M/S JETHMULL CHORDIA AND T O M/S AMITHA BHANDARI, WHICH WERE ` 25,00,000/- AND ` 20,73,000/- RESPECTIVELY. I.T.A. NO. 307/MDS/12 C.O. NO. 34/MDS/12 3 A.O. WAS OF THE OPINION THAT THERE WAS AN EXCESS IN TEREST PAYMENT SINCE ASSESSEE WAS PAYING HIGHER INTEREST ON THE LO ANS TAKEN BY IT FROM RELATIVES, WHEREAS, IT WAS GETTING ONLY LOWER INTEREST ON LOANS GIVEN BY IT TO UNRELATED PARTIES. THE DIFFERENTIAL AMOUNT OF INTEREST WAS WORKED OUT TAKING THE DIFFERENCE OF 18% AND 11% AND RESULTANT DISALLOWANCE CAME TO ` 16,58,713/-. 3. IN ITS APPEAL BEFORE CIT(APPEALS), ARGUMENT OF T HE ASSESSEE WAS THAT A.O. HAD MADE A WRONG COMPARISON OF INTERE ST RECEIPTS AND PAYMENTS. ACCORDING TO ASSESSEE, ADVANCES WERE PUR ELY BASED ON COMMERCIAL EXPEDIENCY, SINCE ASSESSEE WAS HAVING TE MPORARY SURPLUS FUNDS. BY PLACING THE MONEY WITH UNRELATED PARTIES, IT COULD EARN HIGHER INTEREST THAN WHAT IT WOULD HAVE EARNED HAD SUCH FUNDS BEEN PLACED WITH BANKS OR OTHER FINANCIAL INSTITUTI ONS. FURTHER, AS PER THE ASSESSEE, THE CREDITS FOR WHICH ASSESSEE PAID 1 8% WERE MORE THAN SEVEN YEARS OLD IN ITS BOOKS AND INTEREST PAID WAS MUCH LESS THAN WHAT WAS GENERALLY CHARGED BY PRIVATE PARTIES. AGAIN, ACCORDING TO ASSESSEE, ASSESSING OFFICER HAD NOT GIVEN ANY FI NDING THAT THE INTEREST PAID AT 18% PER ANNUM WAS EXCESSIVE WHEN C OMPARED TO FAIR MARKET VALUE. CIT(APPEALS) WAS APPRECIATIVE OF THE SE CONTENTION OF THE ASSESSEE. HE DELETED THE DISALLOWANCE MAKING T HE FOLLOWING OBSERVATIONS:- I.T.A. NO. 307/MDS/12 C.O. NO. 34/MDS/12 4 6.1 THE A.O. COMPARED THE INTEREST PAYMENTS MADE TO THE LOAN CREDITORS AND INTEREST RECEIVED FROM DEPOSITS WITH CERTAIN PARTIES FOR THE PURPOSES OF MAKING DISALLOWANCE AS BOTH ARE DISTINGUISHABLE. LOAN CREDITORS ARE EXISTING MORE THAN 7 TO 8 YEARS AND INTEREST @ 18% P.A. IS NOT PAID BUT ONLY CREDITED TO THEIR ACCOUNTS. HENCE THERE IS NO CASH OUTFLOW ON INTEREST PAYMENTS. FURTHER, THESE LOANS ARE NOT TAKEN DURIN G THE YEAR BUT EXISTING FOR MORE THAN 7 TO 8 YEARS AND SAME RA TE OF INTEREST WAS PAID IN THE EARLIER ALSO THEREBY FOLLO WING THE PRINCIPLE OF CONSISTENCIES WHEREAS INTEREST RECEIPT ON THE ADVANCE TO KHIVRAJ MOTORS THE AMOUNT ADVANCED IS A CALL DEPOSIT WHICH CAN BE CALLED WITH A SHORT TIME OF 12 TO 24 H OURS. HENCE THE DEPOSIT CARRIED 10% WHICH WAS MORE THAN THE BAN K DEPOSIT. THE ADVANCE TO JETHMULL & APARNA WERE ADVANCED IN T HE LAST WEEK OF THE YEAR AND HENCE NO PROVISION FOR INTERES T WAS MADE IN THE BOOKS. 6.2 SECONDLY, IT CAN BE SEEN THAT THE APPELLANT ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND PRUDENCE MADE PARKING OF TEMPORARY SURPLUS FUNDS FOR EARNING INTEREST WITH PRIVATE PAR TIES SINCE ADMITTEDLY THE INTEREST RATES GIVEN BY FINANCIAL IN STITUTIONS AND BANKS WERE IN SINGLE DIGITS. 6.3 HENCE, IN THE ABSENCE OF ANY DEFINITE FINDING T O THE EFFECT THAT THE INTEREST GIVEN IN EXCESSIVE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES OF FACILITIES FOR WHICH THE PAYMENT IS MADE NO DISALLOWANCE COULD BE MADE AND T HE DISALLOWANCE OF ` 16,58,713/- IS DIRECTED TO BE DEL ETED. THIS GROUND OF APPEAL IS ALLOWED. 4. NOW BEFORE US, LEARNED D.R. STRONGLY ASSAILING T HE ORDER OF CIT(APPEALS), SUBMITTED THAT COMMERCIAL EXPEDIENCY FOR GIVING LOANS TO UNRELATED PARTIES, MENTIONED BY THE CIT(APPEALS) WAS NEVER PROVED BY THE ASSESSEE. FURTHER, ACCORDING TO HIM, JUST BECAUSE THERE WAS NO CASH FLOW ON ACCOUNT OF INTEREST DUES, A CLAIM MADE I.T.A. NO. 307/MDS/12 C.O. NO. 34/MDS/12 5 UNDER MERCANTILE SYSTEM OUGHT NOT HAVE BEEN ALLOWED . INTEREST WAS CHARGED BY THE ASSESSEE ON MERCANTILE SYSTEM BASIS IN ITS PROFIT & LOSS ACCOUNT AND THEREFORE, TO SAY THAT IT COULD HA VE BEEN ALLOWED SINCE NO CASH PAYMENT WAS MADE, WAS NOT IN ACCORDAN CE WITH LAW. ACCORDING TO HIM, SIMPLY BASED ON THE SUBMISSIONS O F THE ASSESSEE, THE CIT(APPEALS) HAD DELETED THE DISALLOWANCE. 5. PER CONTRA, LEARNED A.R. SUBMITTED THAT THERE WA S NO FINDING REGARDING ANY EXCESSIVE INTEREST PAID BY THE ASSESS EE TO ITS LOAN CREDITORS. AS PER THE LEARNED A.R., INTEREST AT 18 % PER ANNUM COULD IN NO WAY BE CONSIDERED AS EXCESSIVE. ASSESSING OF FICER IN HIS SCRUTINY ASSESSMENT ORDER FOR ASSESSMENT YEARS 2007 -08 AND 2009- 10, HAD ACCEPTED SUCH CLAIM OF INTEREST PAYMENT ON THE SAME LOANS. THE LOANS WERE FROM RELATED PARTIES AND APPEARING I N THE BOOKS OF THE ASSESSEE SINCE LAST SIX TO SEVEN YEARS. INTEREST W AS PAYABLE TO SUCH PARTIES FROM THE VERY BEGINNING AND NO DISALLOWANCE WHATSOEVER WAS MADE IN EARLIER YEARS. ACCORDING TO HIM, BASED ON THE RULE OF CONSISTENCY ITSELF, REVENUE COULD NOT HAVE MADE A D ISALLOWANCE. IN ANY WAY, AS PER LEARNED A.R., ASSESSEE WAS HAVING O WN FUNDS AS WELL AS SUBSTANTIAL PROFITS AND SURPLUS AVAILABLE W ITH IT FOR MAKING INVESTMENTS WITH NON-RELATED PARTIES FOR GETTING RE TURNS OF INTEREST. RELIANCE WAS PLACED ON THE DECISION OF HONBLE JURI SDICTIONAL HIGH I.T.A. NO. 307/MDS/12 C.O. NO. 34/MDS/12 6 COURT IN THE CASE OF CIT V. HOTEL SAVERA (239 ITR 7 95) AND ALSO THAT OF HONBLE APEX COURT IN THE CASE OF MUNJAL SALES C ORPORATION V. CIT (2008) 298 ITR 298. 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THERE IS NO DISPUTE THAT ASSESSEE HAD PAID 18% INTE REST TO ITS RELATED PARTIES ON THE LOANS RECEIVED. THERE IS ALSO NO DI SPUTE THAT ASSESSEE HAD RECEIVED INTEREST ONLY AT THE RATE OF 11% FROM M/S KHIVRAJ MOTORS AND 10% FROM M/S MARDIA METAL INDUSTRIES. NO INTER EST WHATSOEVER WAS RECEIVED BY THE ASSESSEE ON THE LOANS GIVEN BY IT TO JETHMULL CHORDIA AND AMITHA BHANDARI. ASSESSING OFFICER WAS THUS OF THE OPINION THAT DISALLOWANCE OF PRO RATA INTEREST CLAI M WAS CALLED FOR. LEARNED A.R. HAS PLACED RELIANCE ON THE BALANCE SHE ET AS ON 31.3.2008 OF THE ASSESSEE PLACED AT PAPER-BOOK PAGE 5. CAPITAL ACCOUNT OF THE ASSESSEE AS AT THE BEGINNING OF THE YEAR AND AS AT THE END OF THE YEAR AS APPEARING IN THE SAID BALANCE SH EET, READ AS UNDER:- CAPITAL ACCOUNT AT BEGINNING AT END 6,495 , 485 MAHAVEERCHAND BHANDARI 22,941,113.87 4,704,366 NAVEEN BHANDARI 32,931,270.48 3,732,767 NITESH KUMAR 31,454,182.56 4,373,410 MILAPCHAND BHANDARI 27,949,000.29 4,124,245 SANDEEP KUMAR 39,923,103.59 2 ,34,30,273 15,51,98,670.79 I.T.A. NO. 307/MDS/12 C.O. NO. 34/MDS/12 7 ASSESSEE HAD UNSECURED LOANS OF ` 2,87,81,863/- AND SECURED LOANS OF ` 15,10,94,669/- AS ON 31.3.2008. THUS ASSESSEE HAD OWN FUNDS AS WELL AS LOAN FUNDS AVAILABLE WITH IT FOR GIVING ADVANCES TO ITS NON- RELATED PARTIES. IF WE LOOK AT THE BANK BALANCE OF THE ASSESSEEAS ON 31.3.2008, IT IS ` 2,34,44,934/-. SO, THERE IS CONSIDERABLE WEIGHT I N THE CONTENTION OF THE ASSESSEE THAT IT HAD SUBSTANT IAL LIQUID FUNDS AVAILABLE WITH IT FOR ADVANCING MONEY TO UNRELATED PARTIES. THAT ASSESSEE HAD SUBSTANTIAL OWN FUNDS IS CLEAR SINCE P ARTNERS DURING THE RELEVANT PREVIOUS YEAR ITSELF HAD INTRODUCED A SUM OF ` 13,17,68,397/-. ALL THE LOAN CREDITORS WERE APPEARING SINCE AT LEAS T SEVEN YEARS AND THIS FINDING OF THE CIT(APPEALS) HA S NOT BEEN DISPUTED BY THE REVENUE. IN OUR OPINION, IN SUCH A SITUATION, TO PICK OUT FEW OF THE LOANS GIVEN BY THE ASSESSEE AND MAKE A COMPARISON OF THE INTEREST RATE, WILL NOT BE APPROPRIATE. THE RE IS NOTHING ON RECORD TO SHOW THAT THE AMOUNTS GIVEN BY THE ASSESS EE AS LOAN WERE COMING OUT OF INTEREST BEARING FUNDS. HONBLE JURI SDICTIONAL HIGH COURT IN THE CASE OF HOTEL SAVERA (SUPRA) HAS CLEAR LY HELD THAT IF THERE WAS NO MATERIAL TO INDICATE THAT MONEYS WERE ADVANC ED OUT OF BORROWED FUNDS, THE PRESUMPTION WOULD ALWAYS BE THA T MONEYS WERE ADVANCED OUT OF OWN FUNDS. IN SUCH CIRCUMSTANCES, WE ARE OF THE I.T.A. NO. 307/MDS/12 C.O. NO. 34/MDS/12 8 VIEW THAT THE CIT(APPEALS) WAS JUSTIFIED IN DELETIN G THE DISALLOWANCE OF INTEREST MADE BY THE A.O. NO INTERFERENCE IS CA LLED FOR. 7. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DI SMISSED. 8. CROSS-OBJECTION FILED BY THE ASSESSEE BEING IN S UPPORT OF THE ORDER OF CIT(APPEALS) HAS THEREFORE BECOME INFRUCTU OUS. 9. IN THE RESULT, BOTH THE APPEAL AS WELL AS THE CR OSS-OBJECTION ARE DISMISSED. THE ORDER WAS PRONOUNCED IN THE COURT ON THURSDAY, THE 19 TH OF JULY, 2012, AT CHENNAI. SD/- SD/- (V.DURGA RAO) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 19 TH JULY, 2012. KRI. COPY TO: (1) ASSESSEE (2) ASSESSING OFFICER (3) CIT(A)-IX, CHENNAI-34 (4) CIT-VII, CHENNAI (5) D.R. (6) GUARD FILE