M/s Jaico Automobile Engineering Company Pvt. Ltd., Bangalore V. ACIT, Bangalore

ITA 1056/BANG/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57561 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 07-03-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 02-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Opportunity of being heard; Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER ITA NO.1056/BANG/2010 ASSESSMENT YEAR : 2006-07 M/S. JAICO AUTOMOBILE ENGINEERING COMPANY PVT. LTD., 9/19, II STAGE, D.K. INDUSTRIAL AREA, MAHADEVAPURA, BANGALORE 560 048. PAN : AAACJ 5640E VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 11(5), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SMT. SHEETAL BORKAR, ADVOCATE RESPONDENT BY : SHRI FARAHAT HUSSAIN QURESHI, CIT-II(DR) DATE OF HEARING : 08.03.2012 DATE OF PRONOUNCEMENT : 22.03.2012 O R D E R PER N.K. SAINI, ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 01.03.2010 OF THE LD. CIT(APPEALS)-I, BANGALORE. 2. THE FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS A PPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) OUGHT TO HAVE ALLOWED THE TRAVELING EXPENSES AS CLAIMED BY THE AP PELLANT IN FULL AND REFRAINED FROM UPHOLDING THE DISALLOWANCE OF RS.2,19,703/-. 2. THE LEARNED COMMISSIONER (A) OUGHT TO HAVE APPR ECIATED THAT THE TRAVELING EXPENSES INCURRED BY THE WIFE O F THE MANAGING DIRECTOR OF THE COMPANY ALONG WITH HIM WAS ESSENTIA LLY REQUIRED ITA NO.1056/BANG/10 PAGE 2 OF 8 FOR THE BUSINESS PURPOSE AND WAS LIABLE TO BE ALLOW ED AS HELD IN VARIOUS JUDICIAL PRONOUNCEMENTS RELIED UPON AND CIT ED BEFORE HIM. 3. THE LEARNED COMMISSIONER (A) OUGHT TO HAVE APPR ECIATED THAT THE INTEREST EXPENDITURE INCURRED BY THE APPEL LANT WAS EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NO PART OF THE LOAN WAS BORROWED HAVING BEEN DIVERTED TOWARDS NON-BUSIN ESS PURPOSE. 4. THE LEARNED COMMISSIONER (A) OUGHT TO HAVE APPR ECIATED THAT NO PART OF THE LOAN BORROWED HAD BEEN PROVIDED TO THE RELATIVES OF THE DIRECTORS TO JUSTIFY THE DISALLOWA NCE AS THE COMPANY HAD SUFFICIENT NON-INTEREST BEARING FUNDS F OR SUCH ADVANCES. 5. ON THE FACTS THE LEARNED COMMISSIONER (A) OUGHT TO HAVE ACCEPTED THE SUBMISSIONS AND ALSO EVIDENCE PLACED B EFORE HIM AND OUGHT TO HAVE REFRAINED FROM UPHOLDING THE DISA LLOWANCE AS MADE BY THE ASSESSING AUTHORITY. 6. WITHOUT PREJUDICE THE DISALLOWANCES ARE EXCESSI VE, ARBITRARY AND UNREASONABLE AND OUGHT TO BE DELETED IN TOTO. 7. THE LEARNED COMMISSIONER (A) ERRED IN CONFIRMIN G THE INTEREST LEVIED U/S.234B, 234C AND 234D OF THE ACT. 8. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED A T THE TIME OF HEARING OF THE APPEAL THE APPELLANT PRAYS THAT T HE APPEAL MAY BE ALLOWED. 3. VIDE GROUND NOS. 1 & 2, THE GRIEVANCE OF THE ASS ESSEE RELATES TO SUSTENANCE OF DISALLOWANCE OF 2,19,703 MADE BY THE AO ON ACCOUNT OF TRAVELLING EXPENSES. 4. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THA T THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.11.06 DECLARING AN INCOME OF RS.1,35,71,210, WHICH WAS PROCESSED U/S. 143(1) OF THE INCOME-TAX ACT, 19 61 [HEREINAFTER REFERRED TO AS THE ACT IN SHORT]. LATER ON THE CASE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER ITA NO.1056/BANG/10 PAGE 3 OF 8 NOTICED THAT THE ASSESSEE HAD DEBITED THE TRAVELING EXPENSES RELATING TO PERSONAL TRAVEL OF DIRECTORS AND THEIR SPOUSES. TH E AO WAS OF THE VIEW THAT THE SAID EXPENDITURE WAS NOT ALLOWABLE. HE THEREF ORE MADE THE DISALLOWANCE OF RS.2,19,703. 5. THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A ) AND SUBMITTED THAT THE DIRECTOR OF COMPANY WAS SUFFERING FROM HYPERTEN SION AND CORONARY ARTERY DISEASE, WHENEVER HE TRAVELED, HIS WIFE ACCO MPANIED HIM AS AN ATTENDANT AND SUCH EXPENSES WAS THEREFORE LINKED TO THE BUSINESS OF THE ASSESSEE COMPANY, SO EXPENSES FOR BUSINESS TRIP OF THE DIRECTOR WAS ALLOWABLE. 6. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE WIFE ACCOMPANYING THE HUSBAND SOL ELY AS AN ATTENDANT WAS NOT PALATABLE, SUCH ACCOMPANYING COULD NOT BE T REATED EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. HE FURTHER OBSERVED THAT PERSONAL BENEFIT OF THE DIRECTOR FROM SUCH JOURNEYS ALSO COULD NOT BE OVERL OOKED, HE THEREFORE CONFIRMED THE ACTION OF THE ASSESSING OFFICER. NOW THE ASSESSEE IS IN APPEAL. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT EXPENSES WERE INCURRED FOR THE BUSINESS PURPOSES SINCE THE DIRECT OR WAS SUFFERING FROM VARIOUS AILMENTS AND HIS WIFE ACCOMPANIED HIM ON TH E BUSINESS TRIP, SO THOSE WERE ALLOWABLE EXPENSES. RELIANCE WAS PLACE D ON THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F CIT V. LUWA INDIA LTD. IN ITA NO.1297 OF 2006, ORDER DATED 30.11.2011, COPY OF THE SAID ORDER WAS FURNISHED. ITA NO.1056/BANG/10 PAGE 4 OF 8 8. IN HIS RIVAL SUBMISSIONS, THE LD. CIT(DR) STRONG LY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT THE EXPENSES IN QUESTION WERE NOT FOR THE BUSINESS PURPOSES. THEREFORE THE AO RIGHTLY MADE THE DISALLOWANCE AND THE LD. CIT(A) WAS JUSTIFIED IN CO NFIRMING THE ACTION OF THE ASSESSING OFFICER. RELIANCE WAS PLACED ON THE DECI SION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT V. SMT. I. SUREKHA P. KOTHARI [2004] 267 ITR 406 . 9. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. IN THE PRESENT CASE, IT IS NOTICED THAT THE AO MADE THE DISALLOWAN CE BY OBSERVING THAT THE DIRECTORS AND THEIR SPOUSES TRAVELLED ABROAD AND TH AT TRAVEL WAS PERSONAL IN NATURE. ON THE OTHER HAND, THE CLAIM OF THE ASSES SEE IS THAT THE DIRECTOR OF THE COMPANY TRAVELLED FOR BUSINESS PURPOSES AND HIS WIFE ACCOMPANIED HIM. IN THE PRESENT CASE, THE FACTS ARE NOT CLEAR AS TO WHETHER THE DIRECTOR TRAVELED FOR THE BUSINESS PURPOSES, EVEN THERE IS C ONTRADICTION IN THE STAND TAKEN BY BOTH THE PARTIES SINCE THE AO MENTIONED TH AT THE EXPENSES WERE INCURRED FOR DIRECTORS AND THEIR SPOUSES, WHILE CLA IM OF THE ASSESSEE IS THAT THE WIFE OF ONE OF THE DIRECTOR ACCOMPANIED HIM BEC AUSE HE WAS SUFFERING FROM VARIOUS DISEASES. THE LD. CIT(A) CONFIRMED TH E ACTION OF THE AO BY OBSERVING THAT THE INHERENT ELEMENT OF ENJOYMENT AN D ENTERTAINMENT TO WIFE FROM SUCH TRIPS COULD NOT BE RULED OUT. BUT NOTHIN G IS BROUGHT ON RECORD TO SUBSTANTIATE THE ABOVE OBSERVATIONS. WE THEREFORE CONSIDERING THE TOTALITY OF THE FACTS AS DISCUSSED HEREIN ABOVE AND PARTICUL ARLY IN THE ABSENCE OF CLEAR FACTS BROUGHT ON RECORD, THINK IT APPROPRIATE TO REMAND THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER TO BE ADJUDICA TED AFRESH IN ACCORDANCE ITA NO.1056/BANG/10 PAGE 5 OF 8 WITH LAW, AFTER PROVIDING DUE AND REASONABLE OPPORT UNITY OF BEING HEARD TO THE ASSESSEE. 10. THE NEXT ISSUE RAISED BY THE ASSESSEE VIDE GRO UND NOS. 3 TO 5 RELATES TO THE DISALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE. 11. THE FACTS RELATING TO THIS ISSUE IN BRIEF ARE T HAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT THE A SSESSEE HAD MADE NON-INTEREST BEARING ADVANCES TO ITS GROUP CONCERNS AND THE DIRECTORS AS PER THE FOLLOWING DETAILS: S.NO. NAME OF THE PARTY AMOUNT 1. JEWELS INDIA HOTELS RS. 33,34,224 2. AZAD BODY BUILDERS, JAIPUR RS. 76,97,331 DIRECTORS 3. A) T.S. CHADHA RS. 17,80670 4. B) A.S. CHADHA RS. 21,58,235 5. C) C.S. CHADHA RS. 11,60,681 6. D) H.S. CHADHA RS. 15,59,870 TOTAL RS. 1,76,91,011 12. ACCORDING TO THE AO, THE ASSESSEE HAD INCURRED INTEREST EXPENSES OF RS.1,73,42,367 IN ITS BOOKS OF ACCOUNTS AND THE INTEREST EXPENSES RELATABLE TO THE AFORESAID AMOUNT WAS TO BE DISALLO WED. HE WORKED OUT THE NOTIONAL INTEREST BY APPLYING 12% RATE OF INTEREST ON THE AMOUNT OF RS.1,76,91,011 AND MADE THE ADDITION OF RS.21,22,92 1. THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND THE SUBMIS SIONS MADE BEFORE HIM AS MENTIONED IN PARA 8 OF THE IMPUGNED ORDER ARE RE PRODUCED VERBATIM AS UNDER: 8. THE ASSESSING OFFICER HAS ADDED BACK A SUM OF RS.21,22,921/- BEING 12% (SBI LENDING RATE) ON A SU M OF RS.1,76,91,011/- HOLDING IT TO BE THE INTEREST ATTR IBUTABLE TO THE ITA NO.1056/BANG/10 PAGE 6 OF 8 ADVANCE MADE BY THE APPELLANT COMPANY TO ITS DIRECT OR SRI. B.S.CHADHA. THE INTEREST OF RS.21,22,921/- WAS DISA LLOWED OUT OF THE INTEREST CLAIMED BY THE APPELLANT COMPANY ALLEG ING THAT THE INTEREST WAS NOT ATTRIBUTABLE TO THE BUSINESS REQUI REMENT OF THE APPELLANT COMPANY AND THE BORROWED FUNDS HAD BEEN D IVERTED FOR NON-BUSINESS PURPOSES. IT IS SUBMITTED THAT THE AMO UNT ADVANCED TO SRI.B.S. CHADHA STOOD AT RS.1,76,91,011/- ON THE LAST DATE OF THE ACCOUNTING YEAR. AT THE TIME THE APPELLANT COMP ANY HAD ALSO OWED SRI. CHADHA. THE APPELLANT COMPANY FOR THE SAK E OF CONVENIENCE HAVE MADE SEPARATE ACCOUNT FOR THE AMOU NT THE APPELLANT COMPANY OWED SRI. CHADHA AND ALSO THE AMO UNT RECEIVABLE FROM HIM. BOTH THE ACCOUNTS SHOULD BE CO MBINED AND CONSIDERED SINCE IT IS A RUNNING ACCOUNT BETWEEN TH E APPELLANT COMPANY AND SRI.CHADHA. SUCH A COMBINED READING OF BOTH THE ACCOUNTS WOULD CLEARLY SHOW THAT AT THE END OF THE ACCOUNTING YEAR, THE BALANCE OUTSTANDING FROM SRI. CHADHA WOUL D BE ONLY A SMALL AMOUNT AND THE APPELLANT COMPANY HAD ADEQUATE NON INTEREST BEARING FUNDS FOR SUCH - ADVANCE MADE TO S RI. CHADHA. THUS, THE ASSUMPTION THAT THE INTEREST BEARING FUND S HAD BEEN DIRECTED TO SRI. CHADHA WAS INCORRECT AND CONSEQUEN TIALLY THE DISALLOWANCE OF INTEREST ON THE LOAN BORROWED TO TH E EXTENT OF RS.21,22,921/- WAS TOTALLY UNCALLED FOR. IN FACT, M OST DISALLOWANCES HAD BEEN IN THE PAST AS IT WAS FULLY SATISFIED THAT THE BORROWED FUNDS WERE UTILIZED EXCLUSIVELY FOR BU SINESS AND THUS THE INTEREST CLAIMED WAS LIABLE TO BE ALLOWED IN TOTO U/S.36(1)(III) OR U/S.37 OF THE ACT. WITHOUT PREJUD ICE, EVEN IF SUCH DISALLOWANCE IS CALLED FOR, IT CAN ONLY BE ON THE N ET OF THE BALANCE AND TO THE EXTENT THE NET OF THE BALANCE INCLUDED N ET OF OPENING BALANCE. INTEREST IN RELATION TO SUCH OPENING BALAN CE CANNOT BE DISALLOWED AS THERE WAS NO DISALLOWANCE IN THE PAST AS HELD BY THE HONBLE HIGH COURT IN THE CASE OF SRI. DEV ENTERPRI SES REPORTED IN 192 ITR 165. ACCORDINGLY, IT IS SUBMITTED THAT T HE DISALLOWANCE OF INTEREST MAY KINDLY BE DELETED. IN THE CIRCUMSTANCES, THE IMPUGNED ADDITIONS AS MAD E BY THE ASSESSING OFFICER ARE OPPOSED TO LAW AND LIABLE TO BE DELETED IN TOTO. 13. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION S OF THE ASSESSEE CONFIRMED THE ADDITION BY OBSERVING IN PARA 8.1 OF THE IMPUGNED ORDER AS UNDER: ITA NO.1056/BANG/10 PAGE 7 OF 8 8.1 I FIND THE WHOLE ARGUMENT OF THE A.R. ON THIS ISSUES IS MISCONCEIVED. THE ASSESSING OFFICER HAS, NOWHERE I N THE ASSESSMENT ORDER STATED THAT THE LOAN IS TO THE DIR ECTOR, B.S. CHADHA, OR PAID TO HIS RELATIVES AT HIS INSTANCE. HAD IT BEEN SO, ENTIRE AMOUNT WOULD HAVE BEEN TREATED AS DEEMED DIV IDEND U/S. 2(22)(E) OF THE I.T. ACT. THE ASSESSING OFFICER ON THE OTHER HAND HAD SPECIFICALLY PICKED OUT THE PERSONS WHO HAVE BE EN ADVANCED INTEREST FREE LOANS. THIS FACT I.E., THE CLAIM OF ASSESSING OFFICER THAT THE FUNDING OF THESE INTEREST FREE LOANS ARE F ROM FUNDS BORROWED BY THE APPELLANT HAS NOT BEEN DISPUTED BY THE APPELLANT. HENCE I HAVE NO OTHER GO BUT TO CONFIRM THE ADDITIO N. THE ISSUE IS DECIDED AGAINST THE APPELLANT. 14. NOW THE ASSESSEE IS IN APPEAL. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT NEITHER THE AO NOR THE LD. CIT(A) AP PRECIATED THE FACTS OF THE PRESENT CASE IN THE RIGHT PERSPECTIVE. IT WAS FURT HER SUBMITTED THAT THERE WAS NO NEXUS BETWEEN THE INTEREST BEARING LOANS AND INTEREST FREE ADVANCES. THEREFORE THE ADDITION ON THE BASIS OF N OTIONAL INTEREST WAS NOT JUSTIFIED. 15. IN HIS RIVAL SUBMISSIONS, THE LD. CIT(DR) STRON GLY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 16. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. IN THE PRESENT CASE, IT IS NOTICED THAT THE AO WHILE MAKING THE AD DITION HAS NOT ESTABLISHED THE NEXUS BETWEEN THE INTEREST BEARING LOANS AND IN TEREST FREE ADVANCES. IT IS NOT BROUGHT ON RECORD HOW MUCH SURPLUS WAS AVAIL ABLE TO THE ASSESSEE OR AS TO WHETHER THE ADVANCES IN QUESTION WERE GIVE N OUT OF THAT SURPLUS. IN OTHER WORDS, ALL THE CLEAR FACTS ARE NOT BROUGHT ON RECORD. IN THE PRESENT CASE, THE LD. CIT(A) CONFIRMED THE ACTION OF THE AO BY OBSERVING THAT THE AO HAD SPECIFICALLY PICKED OUT THE PERSONS WHO HAD BEEN ADVANCED ITA NO.1056/BANG/10 PAGE 8 OF 8 INTEREST FREE LOANS, HOWEVER NOTHING WAS BROUGHT ON RECORD TO SUBSTANTIATE THAT THOSE ADVANCES WERE OUT OF INTEREST BEARING LO ANS. WE THEREFORE, CONSIDERING THE TOTALITY OF FACTS, DEEM IT APPROPRI ATE TO SET ASIDE THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE AND THE MATTER IS REMANDED BACK TO THE AO FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO TH E ASSESSEE. 17. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 22 ND DAY OF MARCH, 2012. SD/- SD/- ( GEORGE GEORGE K. ) ( N.K. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 22 ND MARCH , 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.