M/s Standard Tools Corp., Ludhiana V. ITO, Ludhiana

ITA 1002/CHANDI/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8386 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-01-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 02-01-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 20-09-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business expenditure; Commercial expediency; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 113

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER ITA NO. 1002/CHD/2016 ASSESSMENT YEAR: 2012-13 M/S STANDARD TOOLS CORP., VS THE ITO, G.T. ROAD, WARD-V(4), NEAR GURUDWARA DUKH NIWARAN, LUDHIANA. LUDHIANA. PAN: AADFS9756L (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUDHIR SEHGAL RESPONDENT BY : SHRI S.K.MITTAL, DR DATE OF HEARING : 04.01.2017 DATE OF PRONOUNCEMENT : 12.01.2017 O R D E R THIS APPEAL BY ASSESSEE HAS BEEN DIRECTED AGAINST T HE ORDER OF LD. CIT(APPEALS)-2 LUDHIANA DATED 23.06.20 16 FOR ASSESSMENT YEAR 2012-13. 2. I HAVE HEARD LD. REPRESENTATIVES OF BOTH THE PAR TIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. 3. THE APPEAL IS TIME BARRED BY ONE DAY. THE LD. C OUNSEL FOR THE ASSESSEE SUBMITTED THAT APPEAL PAPERS WERE DISPATCHED WITHIN TIME BY SPEED POST WHICH, HOWEVER , REACHED THE OFFICE OF THE TRIBUNAL LATE. CONSIDERI NG 2 EXPLANATION OF THE ASSESSEE, THE NOMINAL DELAY OF O NE DAY IN FILING THE APPEAL IS CONDONED. 4. ON REVISED GROUND NO. 1, ASSESSEE CHALLENGED THE DISALLOWANCE OF RS. 3,96,246/- UNDER SECTION 36(1)( III) OF THE INCOME TAX ACT. THE ASSESSING OFFICER OBSERVED THAT ASSESSEE FIRM HAD GIVEN INTEREST FREE ADVANCE TO IT S SISTER CONCERN M/S B.S.W. TOOLS PVT. LTD., LUDHIANA AND M/ S SYNERGY TOOLING SOLUTION. THE ASSESSEE WAS ASKED T O EXPLAIN WHY INTEREST NOT CHARGED FROM BOTH THE SIST ER CONCERNS TO WHOM ADVANCE WAS GIVEN WITHOUT ANY BUSI NESS EXPEDIENCY DURING THE YEAR WHILE ASSESSEE HAS PAID INTEREST OF RS. 15,98,468/- ON UNSECURED AND SECURED LOANS D URING THE YEAR. THE ASSESSEE SUBMITTED THAT ADVANCE HAVE BEEN GIVEN TO THE SISTER CONCERN FOR BUSINESS PURPOSES. THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE EXPLAN ATION OF THE ASSESSEE AND HELD THAT EXPENDITURE WAS NOT FOR THE PURPOSE OF EARNING INCOME BUT ONLY FOR THE PURPOSE TO ACCOMMODATE ITS SISTER CONCERN. THE ASSESSING OFFI CER, THEREFORE, DISALLOWED THE ABOVE INTEREST. 5. IT WAS SUBMITTED BEFORE LD. CIT(APPEALS) THAT AS SESSEE FIRM GOT OVERDRAFT LIMIT FROM AXIS BANK, LUDHIANA B Y MORTGAGING PROPERTY NO. B-XX-2797 SITUATED AT GURDE V NAGAR, LUDHIANA OWNED BY SHRI WAZIR SHAH, PARTNER O F M/S B.S.W. TOOLS CORP., LUDHIANA. COPY OF THE BANK CER TIFICATE WAS FILED (PB-6). IT WAS SUBMITTED THAT IF THE PRO PERTY OF THE PARTNER OF THE SISTER CONCERN WAS NOT GIVEN TO THE BANK FOR COLLATERAL SECURITY, THE ASSESSEE COULD NOT HAV E DONE 3 BUSINESS TO THE EXTENT IT HAD DONE. FURTHER, ASSES SEE'S CONCERN USED LOANS WHICH OBTAINED FROM THE ASSESSEE FOR BUSINESS PURPOSES AND EARNED INCOME AND PAID INCOME TAX ACCORDINGLY. NO AMOUNT OF LOAN WAS USED FOR NON-BU SINESS PURPOSES OR PERSONAL PURPOSES AND THIS FACT IS ALSO NOT DISPUTED BY THE ASSESSING OFFICER. THE ASSESSEE RE LIED UPON DECISION OF HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD VS CIT 288 ITR 1 IN WHICH IT WAS HELD THAT INTEREST FREE LOAN GIVEN TO SISTER CONCERN AS A MEA SURE OF COMMERCIAL EXPEDIENCY, INTEREST SHOULD BE ALLOWED. IT WAS ALSO SUBMITTED THAT ASSESSEE ADVANCED LOAN TO THE S ISTER CONCERN AND SISTER CONCERN UTILIZED LOAN FOR BUSINE SS PURPOSE AND EARNED PROFIT BY DOING BUSINESS AND PAI D 30% TAXES. THEREFORE, INCOME IN THE HANDS OF ONE CONCE RN IS EXPENDITURE IN THE HANDS OF ANOTHER CONCERN. 5(I). THE ASSESSEE RELIED UPON DECISION OF HON'BL E SUPREME COURT IN THE CASE OF CIT VS GLAXO SMITHKLIN E (ASIA) PVT. LTD. 236 CTR 113 IN WHICH IT WAS HELD T HAT, WHERE THERE IS A REVENUE NEUTRAL, NO ADVERSE INFER ENCE SHOULD BE DRAWN. THE LD. CIT(APPEALS), HOWEVER, DID NOT ACCEPT CONTENTION OF THE ASSESSEE AND NOTED THAT AD VANCE WAS GIVEN TO THE SISTER CONCERN WHO STOOD GUARANTEE FOR THE ASSESSEE. THE ASSESSEE HAS FAILED TO DISCHARGE THE BURDEN OF PROVING COMMERCIAL EXPEDIENCY. THE LD. CIT(APPE ALS) ALSO NOTED THAT ASSESSEE CONTENDED THAT ASSESSING O FFICER HAS NOT PROVED ANY NEXUS THAT INTEREST FREE ADVANCE S WERE MADE OUT OF BORROWED FUNDS. THE LD. CIT(APPEALS) R EJECTED THIS CONTENTION OF THE ASSESSEE IN VIEW OF THE JUDG EMENT OF 4 THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS ABHISHEK INDUSTRIES LTD. THE LD. CIT(APPEAL S), THEREFORE, HELD THAT FUNDS OF THE ASSESSEE HAVE BEE N DIVERTED TO NON-BUSINESS PURPOSES AND ACCORDINGLY, ADDITION WAS CONFIRMED AND THIS GROUND OF APPEAL OF THE ASSESSEE WAS DISMISSED. 6. AFTER CONSIDERING RIVAL SUBMISSIONS, I AM OF THE VIEW ADDITION IS NOT JUSTIFIED IN THE MATTER. HON'BLE S UPREME COURT IN THE CASE OF S.A.BUILDERS LTD. (SUPRA) HAS OBSERVED THAT THE HIGH COURT AND OTHER AUTHORITIES SHOULD HA VE INQUIRED AS TO WHETHER THE INTEREST FREE LOAN WAS G IVEN TO THE SISTER CONCERN AS A MEASURE OF COMMERCIAL EXPED IENCY AND IF IT WAS, IT SHOULD HAVE BEEN ALLOWED. THE EX PRESSION COMMERCIAL EXPEDIENCY IS THE EXPRESSION OF WIDE I MPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESS MAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITUR E MAY NOT HAVE BEEN INCURRED UNDER LEGAL OBLIGATION BUT Y ET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCUR RED ON ACCOUNT OF COMMERCIAL EXPEDIENCY. IT WAS FURTHER H ELD THAT, HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPAN Y HAS A DEEP INTEREST IN ITS SUBSIDIARY AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO THE SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY F OR SOME BUSINESS PURPOSE, THE ASSESSEE WOULD, IN OUR OPINIO N, ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. 5 7. HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES PVT. LTD. VS CIT 381 ITR 107 CONSIDERING THE DECISION OF HON'BLE SUPREME COURT I N THE CASE OF S.A.BUILDERS (SUPRA) IN PARA 17 HELD AS UND ER : 17. THE ASSESSING OFFICER'S VIEW THAT THE ADVANC E WAS NOT FOR BUSINESS PURPOSES AS THE APPELLANT HAD NO BUSINESS DEALINGS WITH THE SISTER COMPANY IS ERRONEOUS. COMMERCIAL EXPEDIENCY IN ADVA NCING LOANS DOES NOT ARISE ONLY ON ACCOUNT OF THERE BEING TRANSACTIO NS DIRECTLY BETWEEN THE HOLDING COMPANY AND THE SUBSIDIARY COMPANY OR BETWE EN THE GROUP COMPANIES INTER SE. THE TWO COMPANIES MAY EVEN BE I N A DIFFERENT LINE OF BUSINESS. IT WOULD MAKE NO DIFFERENCE. IT WOULD STI LL BE COMMERCIALLY EXPEDIENT FOR ONE GROUP COMPANY TO ADVANCE AMOUNTS TO ANOTHER GROUP COMPANY, IF, FOR INSTANCE, AS A RESULT THEREOF THE FORMER BENEFITS. IN THE PRESENT CASE, AS WE HAVE ALREADY DEMONSTRATED, THER E WOULD BE A DIRECT BENEFIT ON ACCOUNT OF THE ADVANCE MADE BY THE APPEL LANT TO ITS SISTER COMPANY IF THE SAME IMPROVES THE FINANCIAL HEALTH O F THE SISTER COMPANY AND MAKES IT A VIABLE ENTERPRISE. WE HASTEN TO ADD THAT IT IS NOT NECESSARY THAT THE ADVANCE RESULTS IN A POSITIVE TANGIBLE BEN EFIT. SO LONG AS THE AMOUNT IS ADVANCED WITH THAT VIEW IN MIND OR WITH A NY OTHER COMMERCIALLY EXPEDIENT VIEW IN MIND THAT IS SUFFICIENT. 8. CONSIDERING THE FACTS OF THE CASE IN THE LIGHT O F ABOVE LEGAL PROPOSITION, IT IS CLEAR THAT THE ASSESSEE GO T OVER- DRAFT LIMIT FROM AXIS BANK, LUDHIANA FOR BUSINESS P URPOSES BY MORTGAGING THE PROPERTY OF PARTNER OF M/S B.S.W. TOOLS CORPORATION LTD., A SISTER CONCERN. IF THE OVER-DR AFT FACILITY WOULD NOT HAVE BEEN AVAILABLE TO THE ASSESSEE, ASSE SSEE WOULD NOT HAVE DONE THE BUSINESS TO THE EXTENT AS EXPLAINED BEFORE THE AUTHORITIES BELOW. THE SISTER CONCERNS HAVE ALSO EARNED PROFIT BY USING THE IMPUGNED FUNDS AND PAID THE TAXES THEREON. THE LD. COUNSEL FOR THE AS SESSEE WAS, THEREFORE, JUSTIFIED IN ARGUING THAT WHERE THE RE IS A 6 REVENUE NEUTRAL, NO ADVERSE INFERENCE SHOULD BE DRA WN. THE ASSESSEE IS, THEREFORE, ABLE TO EXPLAIN THAT IN TEREST FREE LOANS HAVE BEEN ADVANCED TO SISTER CONCERN FOR BUSI NESS EXPEDIENCY. THE ASSESSEE ALSO PLEADED BEFORE AUTHOR ITIES BELOW THAT ASSESSING OFFICER HAS NOT PROVED ANY NEX US THAT INTEREST FREE ADVANCES WERE MADE OUT OF BORROWED FU NDS. THE LD. CIT(APPEALS) RELIED UPON DECISION OF HIGH C OURT IN THE CASE OF ABHISHEK INDUSTRIES LTD. (SUPRA) WHICH HAVE BEEN OVER-RULED BY HON'BLE SUPREME COURT IN THE CAS E OF HERO CYCLES PVT. LTD. 379 ITR 347 IN WHICH IT WAS H ELD THAT, ADVANCE GIVEN TO SISTER CONCERN FOR BUSINESS EXPEDIENCY, NO DISALLOWANCE SHOULD BE MADE UNDER SE CTION 36(1)(III) OF THE ACT. 9. CONSIDERING ABOVE DISCUSSION, I AM OF THE VIEW DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) O F THE ACT IS NOT JUSTIFIED. I, ACCORDINGLY, SET ASIDE THE ORD ERS OF AUTHORITIES BELOW AND DELETE THE ADDITION. THIS GR OUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 10. ON GROUND NO. 2, ASSESSEE CHALLENGED ADDITION O F RS. 2,29,863/-. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEALING OF TOOLS. THE ASSESSING OFFICER NOTED THAT ASSESSEE HAS DEBITED TO ITS PROFIT & LOSS ACCOUNT AND AMOUNT OF RS. 15,98,468/- UNDER THE HEAD INTEREST ON LOAN. THE ASSESSEE WAS ASKED TO FURNISH DETAILS OF INTEREST P AID. THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAD PAID I NTEREST ON UNSECURED LOANS @ 18% TO THE PERSONS COVERED UND ER SECTION 40A(2)(B) OF INCOME TAX ACT. THE ASSESSING OFFICER 7 HELD THAT IT IS EXCESSIVE AND UNREASONABLE DUE TO T HE FACT THAT ASSESSEE HAD BORROWED FUNDS NORMALLY @ 12% TO 15% FROM THE BANK AND OTHER FINANCIAL INSTITUTIONS. THE REFORE, INTEREST PAID @ 18% TO THE FAMILY MEMBERS WAS FOUND EXCESSIVE. THE ASSESSING OFFICER RESTRICTED THE RA TE OF INTEREST @ 15% UNDER SECTION 40A(2)(B) OF THE ACT A ND MADE THE ABOVE ADDITION. THE ASSESSEE SUBMITTED BEFORE LD. CIT(APPEALS) THAT EVEN IN EARLIER YEARS, ASSESSEE P AID INTEREST @ 18% PER ANNUM TO OUTSIDER AND RELATIVES THEREFORE, IT IS NOT EXCESSIVE. THE LD. CIT(APPEAL S), HOWEVER, DID NOT ACCEPT CONTENTION OF THE ASSESSEE AND DISMISSED THIS GROUND OF APPEAL OF THE ASSESSEE. 11. AFTER CONSIDERING RIVAL SUBMISSIONS, I DO NOT F IND ANY JUSTIFICATION TO SUSTAIN THE ADDITION. THE ASSESSE E FILED CHART OF INTEREST PAID TO THE SAME PERSONS ON UNSEC URED LOANS AT PAGE 7 OF THE PAPER BOOK TO SHOW THAT IN P RECEDING TWO ASSESSMENT YEARS, THE RATE OF INTEREST PAID TO THEM WAS AT 8%. THE LD. CIT(APPEALS) CONFIRMED THE ADDITION BECAUSE ASSESSEE PAID INTEREST TO THE BANKS RANGING BETWEEN 12 TO 15%. IT IS NOT DENYING FACT THAT WHI LE OBTAINING LOANS FROM THE BANK, THE PARTIES SHALL HA VE TO GO THROUGH VARIOUS LEGAL FORMALITIES AND SHALL HAVE TO GIVE SECURITIES TO THE SATISFACTION OF THE BANK BUT IN T HE CASE OF UNSECURED LOAN, NO SUCH FORMALITY AND GUARANTEE/SEC URITY SHALL HAVE TO BE GIVEN. THE ASSESSING OFFICER HAS ALSO NOT MAKE OUT A CASE OF UNREASONABLE PAYMENT OF INTEREST , AS REGARDS THE FACILITIES AVAILABLE TO THE ASSESSEE. THEREFORE, CONSIDERING HISTORY OF THE ASSESSEE THAT ASSESSEE P AID 8 INTEREST @ 18% TO THE SAME PARTIES IN PRECEDING ASSESSMENT YEARS, I DO NOT FIND IT TO BE UNREASONAB LE OR EXCESSIVE INTEREST PAID. I, ACCORDINGLY, SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND DELETE THE ADDITION. 12. IN THE RESULT, THIS GROUND OF APPEAL OF THE ASS ESSEE IS ALLOWED. 13. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT. SD/- (BHAVNESH SAINI) JUDICIAL MEMBER DATED : 12 TH JANUARY,2017. POONAM COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT,DR ASSISTANT REGISTRAR, ITAT CHANDIGARH