M/s. VBC Industries Ltd, Hyderabad V. DCIT, Circle -3(3), Hyderabad

ITA 1062/HYD/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2851 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 02-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: V SHIV KUMAR
• Keywords: Proportionate interest; Corroborative evidences; Assessment record
• Section: 143(3); 263; 63

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B : MUMBAI BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.1062/HYD/2011 ASSESSMENT YEAR 2006-2007 M/S. VBC INDUSTRIES LTD. HYDERABAD PAN AABCD7333F VS. DCIT, CIRCLE 3 (3) HYDERABAD (APPELLANT) (RESPONDENT) FOR APPELLANT : SHRI V.SHIV KUMAR (A.R.) FOR RESPONDENT : SHRI D.SUDHAKAR RAO (CIT) DATE OF HEARING : 15-04-2013 DATE OF PRONOUNCEMENT : 17-06-2013 ORDER PER SAKTIJIT DEY, J.M. THIS APPEAL FILED BY THE ASSESSEE AGAINST THE ORDE R OF THE CIT(A)-III, HYDERABAD FOR THE A.Y. 2006-2007. THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE GROUNDS : 2.A) THE COMMISSIONER OF INCOME TAX IS NOT JUSTIFI ED IN HOLDING THAT INTEREST TO THE EXTENT OF RS.2,04,01,4 13/- PAID ON BORROWED FUNDS WAS NOT UTILISED FOR THE PUR POSE OF BUSINESS. B) THE COMMISSIONER OF INCOME TAX OUGHT TO HAVE SEE N THAT ALL THE FUNDS RAISED DURING THE YEAR ARE NONINTERES T BEARING AND THEREFORE SHOULD NOT HAVE HELD THAT INT EREST OF RS.2,04,01,413/- IS TO BE DISALLOWED, EVEN THOUG H FRESH INVESTMENTS WERE MADE DURING THE YEAR. THE APPELLANT SUBMITS THAT THE INVESTMENTS MADE DURING THE YEAR WERE MADE ONLY OUT OF INTERNAL ACCRUALS, CAPIT AL AND NON INTEREST BEARING FUNDS RAISED DURING THE YEAR. 2 2. AS CAN BE SEEN FROM THE GROUNDS, THE ONLY GRIEVANCE OF THE ASSESSEE IS AGAINST THE DIRECTION OF THE COMMISSIONER OF INC OME TAX TO DISALLOW THE AMOUNT OF RS.2,04,01,413/- BEING INTEREST PAID ON B ORROWED FUNDS NOT UTILISED FOR THE PURPOSE OF BUSINESS. 3. BRIEFLY STATED FACTS OF THE CASE ARE THAT M/S. B HARAT ALLOYS & ENERGY LTD. WAS A COMPANY ENGAGED IN THE BUSINESS OF MANUF ACTURE OF FERRO SILICON. THIS COMPANY AMALGAMATED WITH THE ASSESSEE I.E., M/S. VBL INDUSTRIES LTD. W.E.F. 1.4.2006. M/S. BHARAT ALLOYS & ENERGY LTD. HAD FILED ITS RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YE AR ON 27.11.2006 DECLARING LOSS OF RS.5,74,54,323/-. INITIALLY THE R ETURN WAS PROCESSED UNDER SECTION 143 (1). SUBSEQUENTLY, HOWEVER, ASSESSEES CASE WAS SELECTED FOR SCRUTINY ASSESSMENT. THE ASSESSING OFFICER AFTER MA KING SOME DISALLOWANCES PASSED THE ASSESSMENT ORDER UNDER SECTION 143(3) ON 31.12.2008 DETERMINING THE LOSS AT RS.4,8,09,026/-. 4. THE COMMISSIONER OF INCOME TAX WHILE EXAMINING T HE ASSESSMENT RECORDS NOTICED THAT THE ASSESSEE HAS DEBITED AN AM OUNT OF RS.2,25,66,465/- TOWARDS INTEREST AND FINANCE CHARG ES ON SECURED AND UNSECURED LOANS OF RS.26,78,57,987/-. HE FURTHER NO TICED THAT THE ASSESSEE HAD MADE INVESTMENT OF RS.31.219 CRORES IN VARIOUS COMPANIES AND AN AMOUNT OF RS.10.91 CRORES WAS ADVANCED TO OTHERS. F ROM THESE FACTS THE COMMISSIONER OF INCOME TAX FORMED AN OPINION THAT T HE LOANS WERE UTILISED FOR OTHER THAN BUSINESS PURPOSE OF THE ASSESSEE, TH E INTEREST DEBITED TO P & L ACCOUNT AMOUNTING TO RS.2,25,66,465/- CANNOT BE A LLOWED AS EXPENDITURE. HE, THEREFORE, ISSUED A NOTICE UNDER SECTION 263 OF THE ACT ON 7.7.2010 DIRECTING THE ASSESSEE TO SHOW CAUSE. 5. THE ASSESSEE IN REPLY TO THE SHOW CAUSE NOTICE S UBMITTED THAT DURING THE YEAR THE ASSESSEE HAD NOT MADE ANY ADVANCES AND IN FACT THERE IS DECREASE IN OTHER ADVANCES TO THE EXTENT OF RS.3,43 ,55,373/-. IT WAS SUBMITTED THAT IT HAD ALSO NOT TAKEN ANY FRESH LOAN S BUT ON THE OTHER HAND HAS REPAID LOANS OF RS.8,23,14,516/-. IT WAS SUBMIT TED THAT INCREASE IN UNSECURED LOAN WAS DUE TO ISSUE OF FULLY CONVERTIBL E DEBENTURES WHICH ARE 3 INTEREST FREE. IT WAS FURTHER SUBMITTED THAT DURING THE A.Y. UNDER DISPUTE, THE ASSESSEE HAD RAISED FUNDS BY ISSUE OF FRESH CAP ITAL, SHARE PREMIUM ETC., TO THE TUNE OF RS.30,40,35,000/-. THE ASSESSEE THUS SUBMITTED THAT THE ASSESSEE DURING THE A.Y. HAD MADE FRESH INVESTMENT OF RS.36,04,37,442/- IN SHARES OF VARIOUS COMPANIES OUT OF RS.47,04,65,000/ - AVAILABLE WITH IT FROM ISSUE OF INTEREST FREE DEBENTURES AND FRESH ISSUE O F SHARE CAPITAL AND PREMIUM THEREON. THE ASSESSEE FURTHER SUBMITTED THA T THE AMOUNT OF RS.2,25,66,465/- CONSISTS OF INTEREST COMPONENT OF RS.2,04,01,413/- AND THE BALANCE AMOUNTS RELATE TO INTEREST ON LATE PAYM ENT OF EXCISE DUTY, INTEREST ON LATE PAYMENT OF TDS AND BANK CHEQUES, H ENCE, IF THERE IS ANY DISALLOWANCE, AT ALL, THEN IT SHOULD BE RESTRICTED TO THE INTEREST COMPONENT OF RS.2,04,01,413/- ONLY. 6. THE COMMISSIONER OF INCOME TAX HOWEVER DID NOT A CCEPT ASSESSEES CONTENTION THAT THE FRESH INVESTMENT IN SHARES WERE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE BY OBSERVING AS U NDER : 4. ON VERIFICATION OF THE RECORDS, IT IS SEEN THAT THERE ARE REPAYMENT OF LOANS TO THE EXTENT OF RS.8,23,14,516/ - AND AS PER THE DETAILS OF INCREASE IN SHARE CAPITAL DUR ING THE PREVIOUS YEAR THE AMOUNTS ARE RECEIVED AT THE FAG E ND OF THE YEAR. HENCE, IT CANNOT BE SAID THAT THE AMOUNTS WERE UTILISED FOR THE FRESH INVESTMENTS DURING THE YEAR. HOWEVER, IN THE ABSENCE OF THE DETAILS OF THE DATES ON WHICH THE INVESTMENTS WERE MADE IT CANNOT BE SAID T HAT THESE AMOUNTS WERE UTILISED FOR THE FRESH INVESTMEN TS DURING THE YEAR. 5. THE BALANCE SHEET SHOWS THAT THE SECURED AND UNSECURED LOAN CREDITORS FROM THE PREVIOUS YEAR AND THE ASSESSEE COULD HAVE USED THESE FUNDS FOR INVESTMENT IN OTHER COMPANIES AS IN THE PREVIOUS YEAR. AS BOTH TH E INVESTMENTS AND THE LOANS ARE BEING CARRIED FORWARD FROM THE PREVIOUS YEAR APART FROM THE FRESH FUNDS RAISED AND INVESTMENTS MADE DURING THE YEAR, IT CAN BE SAID TH AT THE INTEREST PAID TO THE BANKS NOT ONLY INCLUDE THE INT EREST ON UNSECURED LOANS TAKEN DURING THE YEAR WHICH ARE CLA IMED TO BE THE INTEREST FREE DEBENTURES BUT ALSO INCLUDE S THE INTEREST ON LOANS TAKEN IN THE PREVIOUS YEARS. HENC E IT CANNOT BE SAID THAT THE ENTIRE FRESH INVESTMENTS AR E OUT OF THE INTEREST FREE DEBENTURES AND SHARE CAPITAL A ND THE 4 INTEREST DEBITED DOES NOT INCLUDE THE AMOUNTS PAID ON BORROWED FUNDS FOR THE INVESTMENTS MADE. 7. THE COMMISSIONER OF INCOME TAX ACCORDINGLY DIREC TED THE ASSESSING OFFICER TO DISALLOW THE INTEREST AMOUNT OF RS.2,04, 01,413/- ON THE GROUND THAT THE ASSESSEE DID NOT UTILISE THE BORROWED FUND S FOR ITS BUSINESS PURPOSE. 8. THE LEARNED A.R. IN ADDITION TO SUBMISSIONS MADE AT THE TIME OF HEARING OF APPEAL HAS ALSO FILED A WRITTEN SUBMISSI ON. IN THE WRITTEN SUBMISSION THE ASSESSEE HAD SUBMITTED THAT FOR THE A.Y. 2005-06 THE COMMISSIONER OF INCOME TAX HAD ALSO INITIATED PROCE EDINGS UNDER SECTION 263 OF THE ACT FOR DISALLOWANCE OF INTEREST ON LOAN AS UNDER : LOAN AMOUNT INTEREST INCURRED CASH CREDIT FROM UCO BANK 11,25,14,957 77,92,998 SHORT TERM LOANS & ADVANCES FROM BANKS 2,11,07,328 11,78,371 UNSECURED LOANS FROM VBC FERRO ALLOYS LTD. A GROUP COMPANY 5,01,20,220 --- TOTAL 18,37,42,505 89,71,369 9. THE COMMISSIONER OF INCOME TAX HAD ALSO NOTED TH AT THE ASSESSEE HAD MADE INVESTMENTS/ADVANCES OUT OF THE INTEREST F REE LOAN OF RS.5,01,20,220/- OBTAINED FROM VBC FERRO ALLOYS LTD . THE COMMISSIONER OF INCOME TAX FURTHER NOTED THAT THE ASSESSEE DID NOT HAVE ANY SECURED LOANS AS PER THE BALANCE SHEET AS ON 31.3.2004 AND THE EN TIRE SECURED LOAN ON WHICH INTEREST WAS PAID WAS INCURRED DURING FINANCI AL YEAR 2004-05. THE COMMISSIONER OF INCOME TAX TAKING ALL THESE FACTS I NTO CONSIDERATION PASSED AN ORDER UNDER SECTION 263 FOR THE A.Y. 2005-06 HOL DING THAT INTEREST BEARING FUNDS OF RS.3,84,16,719/- WAS UTILISED BY T HE ASSESSEE FOR OTHER THAN BUSINESS PURPOSES. HE, THEREFORE, DIRECTED THE ASSESSING OFFICER TO DISALLOW INTEREST ON THE AFORESAID AMOUNT. THE LEAR NED A.R. SUBMITTED THAT OUT OF THE INTEREST BEARING LOANS OF RS.13,36,22,28 5/- AT THE BEGINNING OF THE YEAR, THE ASSESSEE HAS REPAID RS.3,21,94,296/- DURING THE YEAR AND AS 5 AT THE END OF THE YEAR THE AMOUNT OF INTEREST BEARI NG LOAN WAS REDUCED TO RS.10,14,27,989/-. IT WAS SUBMITTED THAT DURING THE YEAR ASSESSEE HAD RAISED INTEREST FREE FULLY CONVERTIBLE DEBENTURES O F RS.16,64,30,000/-. THE DETAILS OF LOAN AS AT THE BEGINNING AND CLOSING OF THE FINANCIAL YEAR GIVEN IN THE FOLLOWING TABULAR FORM. AS AT 31-03-2005 RAISED DURING THE YEAR REPAID DURING THE YEAR AS AT 31-3-2006 I INTEREST-BEARING FUNDS: 10,14,27,989 I FROM UCO BANK, 11,25,14,957 NIL 1,10,86,968 WANAPARTHY BR. UNSECURED LOANS SHORT TERM LOANS 2,11,07,328 NIL 2,11,07,928 NIL & ADVANCES FROM BANKS TOTAL 13,36,22,285 NIL 3,21,94,296 10,14, 27,989 INTEREST-FREE FUNDS: INT-FREE LOANS FROM 5,01,20,220 NIL 5,01,20,220 NIL CORP. BODIES FULLY CONVERTIBLE NIL 16, 16,64,30,000 NIL 16,64,30,000 I DEBENTURES I I (INTEREST-FREE) TOTAL 5,01,20,220 16, 64,30,000 5,01,20,220 16,64,30,000 I GRAND TOTAL 1 8,37,42,505 16, 64,30,000 8,23,14,516 26,78, 57,969 10. IT WAS SUBMITTED THAT ASSESSEE RAISED FURTHER F UNDS BY ISSUE OF FRESH CAPITAL TO THE TUNE OF RS.13,92,10,000/- AND SHARE PREMIUM THEREON RS.25,35,50,000/-. THEREFORE, THE SURPLUS INTEREST FREE FUND AVAILABLE WITH THE ASSESSEE WAS RS.47,04,65,000/-. OUT OF WHICH TH E ASSESSEE DURING THE YEAR HAD INVESTED RS.36,04,37,442/- IN SHARES OF OT HER COMPANIES. IT WAS SUBMITTED THAT NO INTEREST BEARING FUND WAS UTILISE D TOWARDS INVESTMENT IN SHARES. HE FURTHER SUBMITTED THAT THE DISALLOWANCE OF RS.2,04,01,413/- CONSISTS OF RS.1,73,29,051/- PERTAINING TO INTEREST ON CASH CREDIT ACCOUNT WITH UCO BANK AND AN AMOUNT OF RS.30,72,362/- IS IN TEREST ON BILL DISCOUNTING FACILITY WITH UCO BANK WHICH WERE PUREL Y FOR THE PURPOSE OF BUSINESS. THE LEARNED A.R. SUBMITTED THAT INSTEAD O F DISALLOWING THE ENTIRE INTEREST AMOUNT OF RS.2,04,01,413/- THE COMMISSIONE R OF INCOME TAX 6 SHOULD HAVE DISALLOWED PROPORTIONATE INTEREST ON AN AMOUNT OF RS.3,84,16,719/- WHICH WAS HELD TO BE THE INTEREST BEARING FUNDS TO HAVE BEEN DIVERTED FOR NON-BUSINESS PURPOSES IN THE ORDE RS PASSED UNDER SECTION 263 OF THE ACT FOR THE A.YS 2005-06 AND 2007-08. 11. THE LEARNED DR ON THE OTHER HAND, HAD STRONGLY SUPPORTED THE ORDER OF THE COMMISSIONER OF INCOME TAX AND SUBMITTED THA T THE ASSESSEE HAVING DIVERTED FUNDS FOR NON-BUSINESS PURPOSES DISALLOWAN CE OF INTEREST IS JUSTIFIED. 12. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. AS COULD BE SEEN FROM THE DETAILS OF LOA N AS ON 1.4.2006 THE ASSESSEE WAS HAVING CASH CREDIT LOAN FROM UCO BANK AMOUNTING TO RS.11,25,14,957/-. IT IS THE CONTENTION OF THE ASSE SSEE THAT NO FRESH LOAN WAS TAKEN DURING THE FINANCIAL YEAR RELEVANT TO THE A.Y. UNDER DISPUTE. IT IS THE FURTHER CONTENTION OF THE ASSESSEE THAT THE ASS ESSEE HAS REPAID SECURED LOAN TO THE EXTENT OF RS.1,10,86,968/- OUT OF THE L OAN AMOUNT OF RS.11,25,14,957/- THE ASSESSEE HAS ALSO SUBMITTED T HAT IT HAS REPAID ENTIRE SECURED LOAN OF RS.2,11,07,328/- AND INTEREST FREE LOAN OF RS.5,01,20,220/-. AS IT APPEARS FROM THE ORDER PASSED UNDER SECTION 2 63 OF THE INCOME TAX ACT, 1961, THE COMMISSIONER OF INCOME TAX HAS ALSO NOT DISPUTED THE FACT THAT THE ASSESSEE HAS REPAID LOANS TO THE TUNE OF R S.8,23,00,516/-. HOWEVER, THE COMMISSIONER OF INCOME TAX HAS NOT ACC EPTED THE CLAIM OF THE ASSESSEE TO THE EFFECT THAT ONLY INTEREST FREE FUND S WERE UTILISED FOR INVESTMENT INS HARES BY OBSERVING THAT THE ASSESSEE HAD NOT FURNISHED ANY DETAILS OF THE DATES ON WHICH THE INVESTMENTS WERE MADE TO SHOW THAT ONLY INTEREST FREE FUNDS WERE UTILISED FOR THE FRESH INV ESTMENT DURING THE YEAR BECAUSE AS PER THE DETAILS SUBMITTED BY THE ASSESSE E, AMOUNTS RECEIVED TOWARDS INCREASED SHARE CAPITAL WERE TOWARDS THE FA G END OF THE YEAR. THUS, IT WILL APPEAR THAT IN THE ABSENCE OF DETAILS THE C OMMISSIONER OF INCOME TAX HAS DIRECTED THE ASSESSING OFFICER TO DISALLOW THE INTEREST AMOUNT OF RS.2,04,01,413/-. HOWEVER, IN OUR VIEW, THE COMMISS IONER OF INCOME TAX SHOULD HAVE HIMSELF VERIFIED OR DIRECTED THE ASSESS ING OFFICER TO VERIFY THE DETAILS OF INVESTMENT AND ALSO THE FACT WHETHER ANY INTEREST BEARING FUND 7 WAS UTILISED FOR MAKING INVESTMENT IN SHARES BEFORE DIRECTING DISALLOWANCE OF INTEREST PAID. THIS IS BECAUSE OF THE FACT THAT THE ASSESSEES CLAIM OF AVAILABILITY OF INTEREST FREE FUND HAS NOT BEEN TOT ALLY REJECTED BY THE CIT. HOWEVER, AT THE SAME TIME THE ASSESSEE ALSO MUST PR OVE THE FACT THAT NO INTEREST BEARING FUND FROM THE CASH CREDIT ACCOUNT WAS UTILISED FOR THE PURPOSE OF INVESTMENT IN SHARE BY PRODUCING THE CAS H FLOW POSITION WITH SUPPORTING EVIDENCE AS ON THE DATES ON WHICH INVEST MENT IN SHARES WERE MADE BY THE ASSESSEE. THEREFORE, CONSIDERING THE TO TALITY OF FACTS AND CIRCUMSTANCES OF THE CASE, WE MODIFY THE ORDER OF T HE COMMISSIONER OF INCOME TAX AND DIRECT THE ASSESSING OFFICER TO VERI FY THE UTILISATION OF FUND IN INVESTMENT OF SHARES MADE DURING THE YEAR AND TH EREAFTER, CONSIDER THE DISALLOWANCE OF INTEREST PAID TO BANK IF IT IS FOUN D THAT THE ASSESSEE HAS UTILISED INTEREST BEARING FUNDS FROM ITS CASH CREDI T ACCOUNT WITH UCO BANK FOR INVESTMENT IN SHARES. 13. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 17-06-2013. SD/- SD/- (CHANDRA POOJARI) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATE 17 TH JUNE, 2013. VBP/- COPY TO 1. M/S. VBC INDUSTRIES LTD., 6 - 2 - 913/914, 3 RD FLOOR, PROGRESSIVE TOWERS, KHAIRATABAD, HYDERABAD. PAN AABCD7333F 2. DC IT, CIRCLE 3 (3) , HYDERABAD 3. CIT - II I , HYDERABAD. 4. ADDL. CIT , RANGE - 3, HYDERABAD 5. DR B BENCH, ITAT, HYDERABAD