Jain Irrigation Systems Ltd., Jalgaon V. Dy. CIT, Jalgaon

ITA 1070/PUN/2013

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 9197 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 07-12-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 13-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR VIVEK AGGARWAL
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Notional interest; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 143(3); 37; 12; 28

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO.1070/PUN/2013 / ASSESSMENT YEAR : 2008-09 JAIN IRRIGATION SYSTEMS LTD., N.H.NO.6, BAMBHORI, JALGAON 425001. PAN : AAACJ7163Q. . / APPELLANT V/S DY.COMMISSIONER OF INCOME TAX, INCOME TAX OFFICE, JALGAON 425001. . / RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK. REVENUE BY : SHRI DR. VIVEK AGGARWAL. / ORDER PER ANIL CHATURVEDI, AM : 1. THIS APPEAL FILED BY THE ASSESSEE U/S 253 OF THE ACT IS EMANATING OUT OF THE ORDER OF COMMISSIONER OF INCOME TAX (A) II, NASHIK DT. 19.03.2013 FOR THE ASSESSMENT YEAR 2008-09. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON R ECORD ARE AS UNDER :- 2.1 ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE BUSINESS OF MANUFACTURE OF IRRIGATION SYSTEMS, SPRINKLERS SYSTEM, PVC P IPES AND / DATE OF HEARING : 07.12.2017 / DATE OF PRONOUNCEMENT: 28.02.2018 2 FITTINGS ETC. ASSESSEE FILED ITS RETURN OF INCOME FOR A.Y. 2008 -09 DECLARING TOTAL INCOME OF RS.NIL AND CARRY FORWARD LOSS OF RS.174,74,91,269/-. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER ASSESSMENT WAS FRAMED U/S 143(3) OF THE ACT VIDE ORDER D T.19.12.2011 AND THE TOTAL INCOME BEFORE SETTING UP OF LOSSES WAS DETE RMINED AT RS.1,88,19,97,609/-. AGGRIEVED BY THE ORDER OF AO, ASSESSE E CARRIED THE MATTER BEFORE LD.CIT(A), WHO VIDE ORDER DT.19.03.2013 ( IN APPEAL NO.NSK/CIT(A)-II/429/11-12) GRANTED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APP EAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS : 1. DISALLOWANCE OF PREMIUM OF RS.4,94,72,088 ON RE DEMPTION OF PREFERENCE SHARES 1.1 THE LEARNED CIT (A) ERRED IN ' CONFIRMING THE DISALLOWANCE OF PREMIUM' OF RS. ,94,72,088 ON REDEMPTION OF PREFERE NCE SHARES. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE DISALLOWANCE OF RS. 4,94,72,088 BE CANCELLED. 1.2 THE LEARNED CIT (A) FAILED TO APPRECIATE TH AT IN THE FACTS OF THE CASE , THE CHARACTER OF LOAN HAD NOT CEASED ON CONVERSION INTO PREFERENCE SHARES AND AS SUCH SO CALLED PREMIUM MUST BE TAKEN AS NOTHING BUT INTEREST/FIANCE COST AND CONSEQUENTLY AN ADMISSIBLE DEDUCTION U/S. 36 (I) (III) OR U/S. 28 OR U/S. 37 (1) OF THE ACT . 1.3 THE SUSTAINING OF THE DISALLOWANCE OF RS . 4,94,72,088 WITHOUT APPRECIATING THE FACTS OF THE CASE AND MERELY RELYI NG UPON THE PRECEDING YEAR'S ASSESSMENT CANNOT BE SUSTAINED OR JUSTIFIED . 2. DISALLOWANCE OF RS.17,00,630 OUT OF INTEREST PAID 2.1 THE LEARNED CIT (A) ERRED IN CONFIRMING THE DI SALLOWANCE OF RS . 17 , 00630 OUT OF INTEREST PAID ON ACCOUNT OF INTEREST F REE DEPOSITS GIVEN TO THE OWNERS OF PREMISES. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE SAID DISALLOWANCE BE CANCELLED. 2.2. THE LEARNED CIT (A) FAILED TO APPRECIATE THAT AS NO RENT WAS PAID/PAYABLE, THE AMOUNT OF INTEREST FREE DEPOSIT C ONSIDERING THE LOCATION COULD NOT BE REGARDED AS EXCESSIVE OR UNRE ASONABLE . 2.3 WITHOUT PREJUDICE THE DISALLOWANCE SHOULD BE RESTRI CTED TO A NOMINAL AMOUNT CONSIDERING THE FACT THAT THE APPELL ANT HAD OWNED FUNDS AND THE COST OF BORROWING WAS AROUND 6% P.A. ONLY. 3 3. DISALLOWANCE OF RS.10,20,000 OUT OF INTEREST PAID 3.1 THE LEARNED CIT (A) ERRED IN CONFIRMING THE DI SALLOWANCE OF RS.1 0,20 , 000 OUT OF INTEREST PAID ON THE GROUND OF ALLEGED E XCESSIVE UNREASONABLE INTEREST FREE DEPOSIT TO JAIN BROS. IN DUSTRIES AND DRIP AND PIPE SUPPLIERS IN THE F. Y . 2001-02 . 3 . 2. THE LEARNED CIT (A) FAILED TO APPRECIATE THAT TH E ESTIMATION OF REASONABLE ' DEPOSIT BY THE AO WAS THE RESULT OF GUESS WORK AND SURMISES AND AS SUCH NO DISALLOWANCE WAS CALLED FOR . 3.3. THE LEARNED CIT (A) ERRED IN IGNORING THE ACTU AL COST OF BORROWING WHICH WAS AROUND 6 ' P.A . /OWNED FUNDS OF THE APPELLANT AND CONSEQUENTLY FURTHER ERRED IN CONFIRMING THE DISALL OWANCE OF INTEREST CALCULATED AT 12% P.A. 3.4 THE CIT (A) OUGHT TO HAVE CANCELLED THE DISALLOWANC E OF RS.10 , 20,000 OUT OF INTEREST PAID AS THERE WAS NO DIRECT NEXUS BETWEEN THE GRANT OF INTEREST FREE DEPOSIT AND BORROWED FUN DS AND THE FACT THAT NO DISALLOWANCE WAS MADE IN THE PAST ON THIS SCORE. 4. DISALLOWANCE OF RS.28,87,625 OUT OF INTEREST PAID 4.1 THE LEARNED CIT (A) ERRED IN CONFIRMING THE DIS ALLOWANCE OF RS.28,87,625 OUT OF INTEREST PAID ON THE GROUND OF ALLEGED EXCESS INTEREST FREE DEPOSITS TO S/SHRI. B . H. JAIN, AJIT JAIN, ASHOK JAIN AND SMT . NISHA JAIN. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE SAID DISALLOWANCE BE CANCELLED . 4.2 THE DISALLOWANCE OF RS. 28,87,625 BEING THE RESULT OF GUESS WORK AND SURMISES , COULD NOT BE SUSTAINED. 4 . 3 THE LEARNED CIT (A) FAILED TO APPRECIATE THAT DE POSIT SHAD BEEN GIVEN IN THE COURSE OF AND FOR THE PURPOSE OF BUSIN ESS ONLY AND THAT IN THE YEAR IN WHICH THERE WERE ADEQUATE OWNED FUNDS A ND/OR COST ' OF BORROWING WAS HARDLY AROUND 6%P.A. 5. DISALLOWANCE OF DEPRECIATION ON NON COMPETE FEE 5.1 THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOW ANCE OF DEPRECIATION OF RS.18,28,125 ON COMPETE FEE. 5.2 THE LEARNED CIT (A) ERRONEOUSLY CONCLUDED THAT THE ON COMPETE FEE WAS NOT AN INTANGIBLE ASSET AND AS SUCH NOT SUBJECT TO DEPRECIATION. 5.3 THE LEARNED CIT (A) IN FACT OUGHT TO HAVE HELD THAT THE EXPENDITURE IN THE FORM OF NON COMPETE FEE WAS OF REVENUE NATUR E AND THEREFORE FULLY ALLOWABLE . 5.4 ASSUMING TWO VIEW ARE POSSIBLE, THE LEARNED CIT (A) OUGHT TO HAVE FOLLOWED VIEW FAVOURABLE TO THE ASSESSEE. 4 6. CARRY FORWARD OF LOSSES 6.1 THE LEARNED CIT (A) ON THE FACTS AND IN THE CIRCUMS TANCES OF THE CASE OUGHT TO HAVE ALLOWED THE LOSS OF RS. 8,24 , 94,154 INCURRED BY ORIENT VEGETEXPO LTD., AN AMALGAMATING COMPANY AS T HE REQUISITE CONDITIONS HAD BEEN SATISFIED INSTEAD OF GIVING DIR ECTION TO EXAMINE THE ISSUE AGAIN . 6.2 THE LEARNED AO BE DIRECTED TO ALLOW THE APPELLA NT'S CLAIM FOR CARRY FORWARD OF LOSSES/DEPRECIATION ALLOWANCES INCLUDING FOR THE A . Y.1993- 94 , TO A . Y. 1999-2000 VIZ. RS . 1,31,63,54,679. 3. BEFORE US, AT THE OUTSET, LD.A.R. SUBMITTED THAT ASSESS EE DOES NOT WISH TO PRESS GROUND NO.6. IN VIEW OF THE AFORESAID S UBMISSION, GROUND NO.6 IS DISMISSED AS NOT PRESSED. 4. FIRST GROUND IS WITH RESPECT TO DISALLOWANCE OF PREMIUM P AID ON REDEMPTION OF PREFERENCE SHARES. 4.1. AO NOTICED THAT ASSESSEE HAD CLAIMED EXPENDITURE OF RS.4,94,72,088/- BEING PREMIUM ON ACCOUNT OF REDEMPTION OF 4 % REDEEMABLE PREFERENCE SHARES. AO NOTICED THAT IDENTICAL IS SUE AROSE IN ASSESSEES OWN CASE IN A.Y. 2007-08 AND THE ORDER OF A O WAS UPHELD BY LD.CIT(A). HE THEREFORE, FOLLOWING THE ORDER OF HIS PREDECE SSOR, DISALLOWED THE EXPENSES OF RS.4,94,72,088/-. AGGRIEVED BY T HE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD.CIT(A), WHO C ONFIRMED THE ACTION OF AO. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US. 5. BEFORE US, AT THE OUTSET, LD.A.R. SUBMITTED THAT ON IDEN TICAL FACTS IN ASSESSEES OWN CASE IN A.Y. 2007-08 THE ISSUE W AS DECIDED AGAINST THE ASSESSEE. HE POINTED TO THE RELEVANT FINDINGS IN ITA NO.982/PUN/2013 DT.09.06.2017 FOR A.Y. 2007-08. HE THEREFO RE 5 SUBMITTED THAT THE ISSUE BE DECIDED ACCORDINGLY. LD.D.R. D ID NOT OBJECT TO THE SUBMISSIONS MADE BY LD.A.R. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE M ATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPEC T TO THE ALLOWABILITY OF PREMIUM PAID ON REDEMPTION OF PREFERENCE SHARE S. WE FIND THAT IDENTICAL ISSUE AROSE IN ASSESSEES OWN CASE IN A .Y. 2006-07 AND 2007-08. THE CO-ORDINATE BENCH OF THE TRIBUNAL WHILE DECIDING THE ISSUE IN A.Y. 2006-07 IN FAVOUR OF REVENUE HAD RELIED ON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF HINDU STAN GAS VS. CIT (11) ITR 549 (CAL). THE DECISION IN A.Y. 2006-07 WAS FO LLOWED IN A.Y. 2007-08. THE RELEVANT OBSERVATION OF THE CO-ORDIN ATE BENCH OF THE TRIBUNAL, WHILE DECIDING THE ISSUE IN A.Y. 2006-07 ARE AS UNDER : 4. BRINGING ATTENTION TO GROUND NO.2, WHERE PREMIU M RELATED ISSUE IS RAISED, LD. COUNSEL FAIRLY SUBMITTED THAT THE SA ID ISSUE HAS TO BE DECIDED IN FAVOUR OF THE REVENUE CONSIDERING THE FA CT THAT PREMIUM PAID FOR REDEMPTION OF PREFERENTIAL SHARES IS OF CAPITAL NATURE AND THEREFORE THE SAME IS NOT AN ALLOWABLE EXPENDITURE IN VIEW OF THE HONBLE CALCUTTA HIGH COURT JUDGMENT IN THE CASE OF HINDUSTAN GAS & INDUSTRIES LTD. VS. CIT 117 ITR 549 (CAL.). 5 . ON THIS ISSUE, WE HEARD BOTH THE PARTIES AND FINA LLY GROUND NO.2 RELATING TO PREMIUM PAID ON REDEMPTION OF PREFERENT IAL SHARES IS DISMISSED FOR THE REASONS SPECIFIED BY THE CIT(A) I N HIS ORDER DATED 25- 06-2010. RELEVANT OPERATIONAL PARAGRAPH IN THIS RE GARD IS EXTRACTED AS UNDER : 9.2 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND ASSESSMENT ORDER OF THE A.O. IT IS AN UNDISPUTED FACT THAT THE AMOUNT OF RS.1,18,10,000/- WAS PAID O N ACCOUNT OF PREMIUM AT THE RATE OF RS.47.24 PER PREFERENCE SHAR E. THE EMPHASIS OF THE APPELLANT WAS THAT THE SAID PREMIUM IN RESPECT OF THE PREFERENCE SHARES IS IN THE NATURE OF INTERE ST HENCE ALLOWABLE U/S.36(1)(III) OF THE ACT. IT IS THE CONT ENTION OF THE APPELLANT THAT THE SAID PREMIUM IS COVERED UNDER 'S IMILAR RIGHT OR OBLIGATION' OF THE DEFINITION OF 'INTEREST' U/S.2(2 8A) OF THE ACT. THE ARGUMENTS OF THE APPELLANT ARE NOT ACCEPTABLE. THE APPELLANT ALSO PLACED RELIANCE, ON THE DECISION IN THE CASE OF BOMBAY DYEING MANUFACTURING CO. LTD. 123 ITD 1 RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL. THE HON'BLE TRIBUNAL HELD THAT PREMIUM PAID IN RESPECT OF SECURED PREMIUM NOTES (S PNS) IS IN THE NATURE OF INTEREST AND ALLOWABLE AS DEDUCTION. THERE IS A 6 CLEAR DISTINCTION BETWEEN PREFERENCE SHARES AND SPN S. THE SPNS ARE DEBT INSTRUMENTS WHEREAS THE PREFERENCE SHARES ARE IN THE CATEGORY OF EQUITY CAPITAL. THEREFORE, THE RELIANCE OF THE APPELLANT ON THE SAID DECISION IS OF NO USE. IN VIE W OF THIS, THE ARGUMENT THAT PREFERENCE SHARE CAPITAL IS IN THE NA TURE OF A LONG-TERM DEBT IS ALSO NOT ACCEPTABLE. THE APPELLAN T ALSO RELIED ON THE ACCOUNTING STANDARD 31 REGARDING THE FINANCIAL INSTRUMENTS - PRESEN TATION. A PERUSAL OF THE SAID ACCOUNTING STANDARDS SHOW THAT THE PREFERENCE SHARES ARE NOT E QUATED WITH DEBT INSTRUMENTS. THEY ARE TO BE SHOWN AS A LI ABILITY UNDER THE HEAD 'CAPITAL'. THE DEDUCTION HAS TO BE C ONSIDERED UNDER THE INCOME-TAX PROVISIONS AND ACCOUNTING STAN DARDS CANNOT SUPERSEDE THE INCOME-TAX PROVISIONS. THE APP ELLANT RELIED ON VARIOUS DECISIONS REGARDING THE NATURE OF MEANING OF INTEREST AND ITS ALLOWABILITY. THE LIABILITY OF INT EREST IS NO DOUBT ALLOWABLE EXPENDITURE, WHEREAS IN THE PRESENT CASE THE PREMIUM ON PREFERENCE SHARES CANNOT BE EQUATED WITH INTEREST FOR THE REASONS MENTIONED ABOVE. THEREFORE, THE VAR IOUS DECISIONS RELIED ON BY THE APPELLANT CANNOT BE APPLIED TO THE PRESENT FACTS OF THE CASE. TH US, THE ARGUMENT OF THE APPELLANT THAT THE PREFERENCE SHARES WERE REDEEMABLE, THE PRE MIUM ON THE REDEMPTION OF THE SAME HAD TO BE ALLOWED AS DED UCTION U/S.36(1)(III) OF THE ACT CANNOT BE ACCEPTED FOR TH E FOLLOWING REASONS: A. E V EN THOUGH THE PREFERENCE SHARES ARE REDEEMABLE, IT CANNOT BE EQUATED WITH THE LOANS / BORROWINGS. FOR REDEMPTION OF PREFERENCE SHARES PROVISIONS OF SEC. 80 OF THE COMPANIES ACT, 1956 ARE REQUIRED TO BE FULFILLE D. B. AS PER SECTION 80 OF THE COMPANIES ACT, SUCH REDEMPTION CAN BE MADE ONLY OUT OF THE PROCEEDS OF FRESH ISSUE OF SHARE S OR BY CREATING CAPITAL REDEMPTION RESERVE (CRR) OUT OF THE PROFITS A V AILABLE FOR DIVIDENDS. AS AGAINST THIS FOR REPAYMENT OF LOAN THERE IS NO SUCH REQUIRE MENT. C . THIS CRR IS TREATED AS THE PAID-UP SHARE CAPITAL OF THE COMPANY AND CAN BE UTILIZED ONLY FOR ISSUING BONUS SHARES. D. SUCH CONDITION IS LAID DOWN IN ORDER TO RESTORE THE REDUCTION IN SHARE CAPITAL CAUSED DUE TO REDEMP TION OF PREFERENCE SHARES. E. THEREFORE, THOUGH THE PREFERENCE SHARES ARE REDEEMABLE THEY ASSUME NATURE OF SHARE CAPITAL ONLY AND NOT LOANS. A CLEAR DISTINCTION HAS BEEN MADE BETWEEN A LOAN AN D REDEEMABLE PREFERENCE SHARES BY THE HON ' BLE CALCUTTA HIGH COURT IN THE CA S E OF HINDUSTAN GAS AND INDUSTRIES LTD. (117 ITR 549). TH E HON'BLE HIGH COURT CATEGORICALLY HELD THAT ANY EXPENSES INCURRED FOR ISSUE FOR REDEEMABLE PREFERENCE SHARES CANNOT BE ALLOWED AS T HEY ARE IN THE NATURE OF CAPITAL EXPENDITURE. THE HON'BLE HIGH COU RT HELD AS UNDER IN THIS CONTEXT: 'ON CONSIDERATION OF THE PROVISIONS OF THE COMPANIE S ACT , 1956 THE CONTENTION OF THE ASSESSEE THAT WHEN A COMPANY ISSUES 7 REDEEMABL E PREFERENCE SHARES IT IS IN FACT OBTAINING A LOAN AS IT COULD BY ISSUING DEBENTURES CANNOT BE ACCEPTED. THERE IS A FUNDAMENTAL DIFFEREN C E BETWEEN THE CAPITAL MADE AVAILABLE TO A COMPANY BY ISSUE OF A SHARE AND MONEY OBTAINED BY A COMPANY UNDER A LOAN OR A DEBENTURE. RESPECTIVE INCIDENCES AND CONSEQUENCES OF ISSUING A SHARE AND BORROWING MONEY ON LOAN OR ON A DEBENTURE ARE DIFFERENT AND DISTINCTIVE. A DEB ENTURE-HOLD E R AS A CREDITOR HAS A RIGHT TO SUE THE COMPANY, WHERE AS A SHAREHOLDER HAS NO SUCH RIGHT . APART FROM THAT THE SCHEME OF THE COMPANIES ACT AND IN PARTICULAR THE FORMS AND CONTE NTS OF ITS BALANCE-SHEETS ARE EXTR E MEL Y RIGID AND BY REASON OF THE SPECIFIC COMPARTMENTS IN SUCH ACCOUNTS IT IS NOT POSSIBLE TO CONVERT AN ITEM OF CAPITAL INTO AN ITEM OF LOAN AS HAS BE E N SUGGESTED ON BEHALF OF THE ASSESSEE. IN THE INSTANT CASE, IT IS THE ASSESSEE WHO IS CLAIMING A RELIEF OR ADVANTAGE BY WAY OF AN ALLOW ABLE DEDUCTION IN RESPECT OF AN EXPENDITURE INCURRED BY IT . THEREFORE, IT IS STRICTLY FOR THE ASSESSEE TO ESTABLISH THAT THE EXPENDITURE IN RESPECT OF WHICH DEDUCTION IS BEING CLAIMED IS NOT AN EXPENDITURE IN THE NATURE OF A CAPITAL EXPENDITURE AND THE ASSE SSEE CANNOT CLAIM ANY BENEFIT OF AMBIGUITY OR DOUBT IN ITS FAVO UR . HENCE THE LEGAL CHARGES INCURRED ON THE ISSUE OF A PROSP E CT US, UNDERWRITING COMMISSION AND BROKERAGE PAID FOR THE ISSUE OF REDE EMABLE PREFERENCE SHARES ARE NOT REVENUE EXPENDITURE. AS THE ABOVE DECISION CLEARLY APPLIES TO THE FACTS OF THE PRESENT CASE, THE APPELLANTS CLAIM IS NOT ACCEPTABLE AND THE ACT ION OF THE A.O. IS CONFIRMED. THEREFORE, THE GROUND OF APPEAL RAISED BY THE APPELLANT IN THIS REGARD IS DISMISSED AND THE A.O. IS DIRECTE D ACCORDINGLY. 6. ACCORDINGLY, GROUND NO.2 RAISED BY THE ASSESSEE IS DISMISSED. 7. BEFORE US, ASSESSEE HAS NOT POINTED OUT ANY DISTINGUIS HING FEATURE IN THE FACTS OF THE PRESENT CASE AND THOSE OF E ARLIER YEARS. WE THEREFORE FIND NO REASON TO INTERFERE WITH THE ORDER OF LD .CIT(A). THUS, THE GROUND OF THE ASSESSEE IS DISMISSED. 8. GROUND NOS.2 TO 4 ARE WITH RESPECT TO DISALLOWANCE OF IN TEREST. SINCE THE GROUNDS ARE INTER-CONNECTED, ALL THE GROUNDS A RE CONSIDERED TOGETHER. 9. GROUND NO.2 IS WITH RESPECT TO DISALLOWANCE OF RS.17,00,630/-. 8 9.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NO TICED THAT A FLAT AT WALKESHWAR, MUMBAI WAS TAKEN FROM ATUL JAIN AND OT HER FAMILY MEMBERS OF JAIN FOR THE OFFICERS TRANSIT HOSTEL FOR WH ICH A TOTAL DEPOSIT OF RS.9.60 CRORES WAS PAID BY ASSESSEE UPTO 15. 02.2008 TO VARIOUS FAMILY MEMBERS OF MR JAIN. HE NOTED THAT THE FLAT WAS USED BY MR. ANIL JAIN AS DIRECTORS RESIDENCE AND THAT NO RENT WA S PAID BY THE ASSESSEE. HE ALSO NOTED THAT NONE OF THE FAMILY MEMBERS HAD SHOWN ANY INCOME FROM THE AFORESAID FLAT AND NO PERQUISITE WAS SHOWN BY MR. ANIL JAIN. THE ASSESSEE WAS ASKED TO JUSTIFY THE PAYMENT S TO WHICH ASSESSEE INTER-ALIA SUBMITTED THAT THE FLAT WAS TAKEN ON LEAVE AND LICENCE BASIS AND WAS USED BY THE ASSESSEE FOR ITS OFFICERS , ASSOCIATES. IT WAS SUBMITTED THAT ASSESSEE HAD GIVEN INTEREST FREE DEPOSITS IN EARLIER YEARS AND DURING THE YEAR ADDITIONAL DEPOSIT WAS G IVEN WHICH WAS COMMENSURATE WITH THE HIGHER VALUATION OF THE FLAT AND THAT DEPOSIT WAS NOT INCREASED SINCE 1995. IT WAS SUBMITTED THAT SINCE INTEREST FREE DEPOSIT WAS GIVEN IN LIEU OF RENT, ASSESSEE HA D CLAIMED NOTIONAL INTEREST @ 5.50% P.A. (I.E. AVERAGE COST OF FUNDS FOR THE YEAR UNDER CONSIDERATION) AS ELIGIBLE BUSINESS EXPENSES. THE SUBMISSIONS OF THE ASSESSEE WERE NOT FOUND ACCEPTABLE TO THE AO. AO N OTED THAT ASSESSEE HAD BORROWED FUNDS AND IN MAJORITY OF CASES, TH E RATE OF INTEREST WAS OVER 12%. ACCORDING TO THE AO, HAD THE ASS ESSEE NOT GIVEN INTEREST FREE DEPOSITS TO THE VARIOUS PERSONS OF JA IN FAMILY, THE ASSESSEE WOULD NOT HAVE REQUIRED TO BORROW LOAN AT HIGH ER INTEREST RATE. HE ALSO CONCLUDED THAT THE DEPOSIT PAID TO DIRECTOR S AND FAMILY WAS NOT ON ACCOUNT OF COMMERCIAL EXPEDIENCY BUT WAS ON ACCOUNT OF FAVOUR TO THEM. HE THEREAFTER WORKED OUT THE EXCESS INT EREST AT RS. 17,00,630/- AND DISALLOWED THE SAME. 9 10. GROUND NO.3 IS WITH RESPECT TO DISALLOWANCE OF RS.10,20,000/-. 10.1. AO NOTED THAT ASSESSEE HAD TAKEN PREMISES BELON GING TO JAIN BROS. INDUSTRIES (DEPOSIT OF RS. 80 LACS) AND DRIP AND PIPE SUPPLIERS (DEPOSIT OF RS.20 LACS) ON RENTAL BASIS AGAINST THE INTEREST FREE DEPOSITS GIVEN TO THEM. AO WAS OF THE VIEW THAT THE REASONABLE DE POSIT TO THE AFORESAID PARTIES WAS RS.10 LACS AND RS.5 LACS RESPECTIV ELY AND THUS THE AGGREGATE BALANCE DEPOSIT OF RS.85 LACS WAS UNREASO NABLE. ON SUCH DEPOSIT OF RS.85 LACS, WHICH WAS CONSIDERED AS UNREA SONABLE, HE WORKED OUT THE EXCESS INTEREST @ 12% TO BE UNREASONA BLE AND ACCORDINGLY DISALLOWED RS.10,20,000/-. 11. GROUND NO.4 IS WITH RESPECT TO DISALLOWANCE OF RS.28,87,625/- 11.1. AO NOTED THAT ASSESSEE HAD TAKEN PREMISES BELONG ING TO THE DIRECTORS / RELATIVES OF DIRECTORS ON RENTAL BASIS FOR WHICH ASSESSEE HAD GIVEN INTEREST FREE DEPOSITS. THE RENT WAS ADJUSTED AGA INST THE DEPOSITS. AO WAS OF THE VIEW THAT ASSESSEE HAD GIVEN EXC ESS DEPOSITS. HE THEREAFTER WORKED OUT THE EXCESS DEPOSITS PAID TO T HE VARIOUS PERSONS AS UNDER : SHRI B.H.JAIN RS. 3,06,00,000 / - RS. 1,81,90,317 / - SHRI AJIT JAIN RS. 1,82,40,000 / - RS. 1,38,82,886 / - SHRI ASHOK JAIN RS. 1,14,60,000 / - RS. 79,75,029 / - SMT NISHA JAIN RS. 1,20,00,000 / - RS. 82,78,224 / - RS. 7,23,00,000 / - RS. 4,82,36,45 6 / - 10 ON THE EXCESS DEPOSIT OF RS.2,40,63,544/- (RS.7,23,00,000/- - RS.4,82,36,456/-) AS WORKED OUT BY HIM, HE WORKED OUT THE DISALLOWANCE OF INTEREST @ 12% AND ACCORDINGLY DISALLOWED RS.28,87,625/- AS BEING UNREASONABLE. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD.CIT(A), WHO AFTER C ONSIDERING THE REMAND REPORT AND ASSESSEES REPLY TO THE REMAND R EPORT, GRANTED PARTIAL RELIEF BY OBSERVING AS UNDER: 12. WITH RESPECT TO DISALLOWANCE OF INTEREST OF RS.17,00,630 /- LD.CIT(A) NOTED AS UNDER : 4 . 5.2 I HAVE CAREFULLY GONE THROUGH THE FACTS OF THE CASE. THE APPELLANT HAS FAILED TO PROVE ANY NEXUS BETWEEN THE INTEREST FREE FUNDS AND THE INTEREST FREE ADVANCES OR SECURITY DE POSITS . MOREOVER, THE APPELLANT HAD TAKEN HUGE LOANS FROM BANKS ON WH ICH IT IS REQUIRED TO PAY MARGIN MONEY. HENCE, APPELLANT'S CO NTENTION SUGGESTING THAT ITS INTEREST FRE E FUNDS/OWN FUNDS WERE KEPT ASID E AND THE INTEREST FREE LO A NS / SECURITY, DEPOSITS WERE GIVEN OUT OF THESE KEPT ASID E FUNDS IS DEVOID OF MERIT . A PERUSAL OF AUDIT REPORT FOR AY. 2008-09 REVEALS THAT THE APPELLANT COMPANY HAS TAKE N TOTAL S E CURED LOANS AND UNSECURED LOANS AT RS. 907.04 C RORE IN AY . 2008-09 AS AGAINST RS. 739.73 CRORE IN AY. 200 7 - 0 8 . SCHEDULE 19 OF THE A UDIT REPORT REVEALS THAT THE APPELLANT COMPANY HAD DEBIT E D RS. 83.77 C RORE IN P & L ACCOUNT ON ACCOUNT OF INTEREST AND FINANCE CHAR GE S ( E XCLUDING INT E R E ST RECE I VE D A T RS. 3 . 0 4 C ROR E ) . B E SIDES, TH E A PPELL A NT COMP A N Y HAS DEBITED RS. 29.6 3 C R OR E ON ACCOUNT OF DISCOUNTING CHARG E S, BANK . C OMMI SS I ON AND CHARGES. TAKING INTO CONSIDERATION THE ABOVE STATED FIGURES, THE COST O F BORROWING COMES AT 12.50 % . AS AGAINST THIS THE AO HAS DISALLOWED INTER E S T @ 12 % ON INTEREST FREE LOANS / SECURIT Y DEPOSITS GIVEN BY THE APPELLANT TO IT RELATED CONCE RNS AND DIRECTORS. THE APPELLANT'S CALCULATION OF COST OF BORROWING @ 5.3% IS THEREFORE, FOUND CONTRARY TO THE FACTS GIVE N ABOVE. THERE IS NO DOUBT WHATSOEVER, THAT THE APPELLANT HAS USED BO RROWED FUNDS FOR NON-BUSIN ESS PURPOSES AND HENCE CLAIM OF INTEREST ON THOSE FUNDS U/S 36(1)(III) IS NOT TENABLE. THE HONBLE I TAT HYDERABAD IN THE CASE OF RAVINDRA SINGH ARORA VS. ACIT (2012) 53 SOT 124 (HYDERABAD) IN REGARD TO DISALLOWANCE OF INTEREST U /S 36(1)(III) HAS HELD AS UNDER : 37. SECTION 36(1)(III) OF THE ACT PROVIDES FOR DEDU CTIONS OF INTEREST 11 ON THE LOANS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCTION IN THE BOOKS OF ACCOUNTS, THE ONUS WILL BE ON THE ASSESSEE TO SATISFY THE ASSESSING OFFICER THAT WHATEVER LOANS WERE RAISED BY THE ASSESSEE, THE SAME WERE US ED FOR BUSINESS PURPOSES. IF IN THE PROCESS OF EXAMINATION OF GENUINENESS OF SUCH A DEDUCTION, IT TRANSPIRES THAT THE ASSESSEE HAD ADVANCED CERTAIN FUNDS TO SISTER CONCERNS OR AN Y OTHER PERSON WITHOUT ANY INTEREST, THERE WOULD BE VERY HE AVY ONUS ON THE ASSESSEE TO BE DISCHARGED BEFORE THE ASSESSING OFFICER TO THE EFFECT THAT IN SPITE OF PENDING TERM LOANS AND WORK ING CAPITAL LOANS ON WHICH THE ASSESSEE IS INCURRING LIABILITY TO PAY INTEREST, THERE WAS JUSTIFICATION TO ADVANCE LOANS TO SISTER CONCERNS FOR NON-BUSINESS PURPOSES WITHOUT ANY INTEREST AND ACCO RDINGLY, THE ASSESSEE SHOULD BE ALLOWED DEDUCTION OF INTEREST BE ING PAID ON THE LOANS RAISED BY IT TO THAT EXTENT. 38. THE ENTI RE MONEY IN A BUSINESS ENTITY COMES IN A COMMON KITTY. MONIES REC EIVED AS 38. THE ENTIRE MONEY IN A BUSINESS ENTITY COMES IN A COMMON KITTY. MONIES RECEIVED AS SHARE CAPITAL, AS TERM LO AN, AS WORKING CAPITAL LOAN OR AS SALE PROCEEDS DO NOT HAVE ANY DI FFERENT COLOUR. WHATEVER ARE THE RECEIPTS IN THE BUSINESS, THAT HAV E THE COLOUR OF BUSINESS RECEIPTS AND HAVE NO SEPARATE IDENTIFICATI ON. SOURCES HAS NO CONCERN WHATSOEVER. THE ONLY THING SUFFICIEN T TO DISALLOW THE INTEREST PAID ON THE BORROWING TO THE EXTENT TH E AMOUNT IS LENT TO SISTER CONCERN WITHOUT CARRYING ANY INTEREST FOR NON-BUSINESS PURPOSES WOULD BE THAT THE ASSESSEE HAS SOME LOANS OR OTHER INTEREST BEARING DEBTS TO BE REPAID. IN CASE THE AS SESSEE HAD SOME SURPLUS AMOUNT WHICH, ACCORDING TO IT, COULD N OT BE REPAID PREMATURELY TO ANY FINANCIAL INSTITUTION, STILL THE SAME IS EITHER REQUIRED TO BE CIRCULATED AND UTILISED FOR THE PURP OSE OF BUSINESS OR TO BE INVESTED IN A MANNER IN WHICH IT GENERATES INCOME AND NOT THAT IT IS DIVERTED TOWARDS SISTER CONCERN FREE OF INTEREST. THIS WOULD RESULT IN NOT PRESENTING TRUE AND CORRECT PIC TURE OF THE ACCOUNTS OF THE ASSESSEE AS AT THE COST BEING INCUR RED BY THE ASSESSEE, THE SISTER CONCERN WOULD BE ENJOYING THE BENEFITS THEREOF. IT CANNOT POSSIBLY BE HELD THAT THE FUNDS TO THE EXTENT DIVERTED TO SISTER CONCERNS OR OTHER PERSONS FREE O F INTEREST WERE REQUIRED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUS INESS AND LOANS TO THAT EXTENT WERE REQUIRED TO BE RAISED. WE DO NOT SUBSCRIBE TO THE THEORY OF DIRECT NEXUS OF THE FUND S BETWEEN BORROWINGS OF THE FUNDS AND DIVERSION THEREOF FOR N ON-BUSINESS PURPOSES. RATHER, THERE SHOULD BE NEXUS OF USE OF B ORROWED FUNDS FOR THE PURPOSE OF BUSINESS TO CLAIM DEDUCTIO N UNDER SECTION 36(1)(III) OF THE ACT. THAT BEING THE POSIT ION, THERE IS NO ESCAPE FROM THE FINDING THAT INTEREST BEING PAID BY THE ASSESSEE TO THE EXTENT THE AMOUNTS ARE DIVERTED TO SISTER CO NCERN ON INTEREST FREE BASIS ARE TO BE DISALLOWED. 39. IF THE PLEA OF THE ASSESSEE IS ACCEPTED THAT TH E INTEREST FREE ADVANCES MADE TO THE SISTER CONCERNS FOR NON-BUSINE SS PURPOSES WAS OUT OF ITS OWN FUNDS IN THE FORM OF CAPITAL INT RODUCED IN BUSINESS, THAT AGAIN WILL SHOW A CAMOUFLAGE BY THE ASSESSEE AS AT THE TIME OF RAISING OF LOAN, THE ASSESSEE WILL S HOW THE FIGURES OF CAPITAL INTRODUCED BY IT AS A MARGIN FOR LOANS B EING RAISED AND AFTER THE LOANS ARE RAISED, WHEN SUBSTANTIAL AMOUNT IS DIVERTED TO SISTER CONCERNS FOR NON-BUSINESS PURPOSES WITHOU T INTEREST, A PLEA IS SOUGHT TO BE RAISED THAT THE AMOUNT ADVANCE D WAS OUT OF ITS CAPITAL, WHICH IN FACT STOOD EXHAUSTED IN SETTI NG UP OF THE UNIT. 12 SUCH A PLEA MAY BE ACCEPTABLE AT A STAGE WHEN NO LO ANS HAD BEEN RAISED BY THE ASSESSEE AT THE TIME OF DISBURSE MENT OF FUNDS. THIS WOULD DEPEND ON FACTS OF EACH CASE. 40. ONCE IT IS BORNE OUT FROM THE RECORD THAT THE A SSESSEE HAD BORROWED CERTAIN FUNDS ON WHICH LIABILITY TO PAY TA X IS BEING INCURRED AND ON THE OTHER HAND, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTHERS WITHOUT CARRY ING ANY INTEREST AND WITHOUT ANY BUSINESS PURPOSE, THE INTE REST TO THE EXTENT THE ADVANCE HAD BEEN MADE WITHOUT CARRYING A NY INTEREST IS TO BE DISALLOWED UNDER SECTION 36(1)(III) OF THE ACT. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND KEEPING IN MIND THE JUDICIAL VIEW ON THE SUBJECT, IN MY OPINION THE RE WAS A JUSTIFICATION FOR THE DISALLOWANCE OUT OF INTEREST PAID, CONSIDER ING LARGE INTEREST FREE DEPOSITS, GIVEN TO THE OWNERS OF THE FLATS. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, I AM OF THE VIEW THAT AO WAS JUSTIFIED IN DISALLOWING INTEREST OF RS.17,00,630/-. THE SAME I S CONFIRMED. 13. WITH RESPECT TO DISALLOWANCE OF INTEREST OF RS.10,20,00 0/- LD.CIT(A) NOTED AS UNDER: 4.9.1 I HAVE PERUSED THE RECORDS/DETAILS FILED AND SUBMISSI ONS MADE . THE ISSUE OF COMPANY'S OWN FUNDS OR DEPOSITS OUT OF INTEREST FREE FUND, HAS ALREADY DISCUSSED IN PARA 4. 5 ABOVE. THERE IS ABSOLUTELY NO DOUBT THAT W HILE ON THE ONE HAND COMPANY HAS BORROWED FUNDS FRO M BANKS/FIS, ON THE OTHER H A ND I T IS GIVING HUGE, DISPROPORTIONATE FUNDS IN THE NAME OF SECURITY DEPOSITS TO ITS RELATED CONCER NS AND DIRECTORS. THIS WAY THE APPELLANT COMPANY HAS DIVERTED BORROWED FUN DS FOR NON- BUSINESS PURPOSE. A PERUSAL OF AUDIT REPORT FOR A . Y. 2008-09 REVEALS THAT THE APPELLANT COMPANY HAS TAKEN TOTAL SECURED LOANS AND UNSECURED LOANS AT RS. 907.04 CRORE IN A . Y. 2008-09 AS AGAINST RS. 739 . 73 CRORE IN A . Y. 2007 - 08 . SCHEDULE 19 OF TH E AUDIT REPORT REVEALS THAT THE APPELLAN T COMPANY HAD DEBITED RS. 83 . 77 CROR E IN P & L ACCOUNT ON ACCOUNT OF INTEREST AND FINANCE CHARGES (EXCLUDING INTEREST RECEIVED AT RS. 3.04 CRORE). BESIDES , TH E APPELLANT COMPANY HAS DEBITED RS. 29 . 63 CRORE ON ACCOUNT OF DISCOUNTING CHARGES, BANK COMMI SSION AND CHARGES. TAKING INTO CONSIDERATION THE ABOVE ST ATED FIGURES, THE COST OF BORROWING COMES AT 12 . 50%. AS AGAINST THIS THE AO HAS DISALLOWED INTEREST @ 12% ON INTER E ST FREE LOANS/SECURITY DEPOSITS GIVEN BY THE APP E LLANT TO ITS R E LAT E D CONCERNS AND DIRECTORS. TH E APP E LLANT'S CALCULATION O F COST OF BORROWING @ 5 . 3 % IS F OUND C ONTR A R Y TO THE FACTS GIVEN ABOVE. IN THE FA C T S AND CIRCUMSTANCES OF THE CASE, I AM OF THE VIEW THAT AO WAS JUSTIFIED I N DISALLOWIN G INT E RES T OF RS. 10,20,000/ - . THE SAME IS CONFIRM E D. 14. WITH RESPECT TO DISALLOWANCE OF INTEREST OF RS.28,87,625 /- LD.CIT(A) NOTED AS UNDER: 13 4.10.1 HERE ALSO THE COMPANY HAD TAKEN LAND ON HI RE FROM SHR I . B . H . JAIN AND BUNGALOW FROM OTHER DIR E CTORS (RELATED PARTIES) FOR WHICH INTEREST FRE E DEPOSITS HAD GIVEN MORE THAN 10/12 YEARS BACK . IN ADDITION , RENT WAS A L SO PAYABLE WHICH IS BEING ADJUSTED AGAINST THE SAID DEPOSITS. THE APPELLANT HAS MADE THE SAME ARGUMENTS AS MADE AGAINST THE DISALLO WANCE OF INTEREST OF RS.10,20,000 REFERRED TO IN THE PRECEDI NG PARAS. THE IDENTICAL ISSUE HAS BEEN DISCUSSED IN DETAIL IN PAR A 4.5 AND 4 . 9 ABOVE. THE FACTS ARE IDENTICAL . THE AO HAS CALCULATED INTEREST AT 12 % ON THE AMOUNT OF ESTIMATED EXCESS DEPOSIT OF RS. 40 ,63,544/- AND WORKED OUT THE DISALLOWANCE OUT OF INTEREST PAID A T RS. 2 8,87,625/-. KEEPING IN VIEW MY DECISION IN PARA 4.5 AND 4.9 IN REGARD TO RATE OF INTEREST I.E. @ 12% THE ADDITION OF RS. 28.87.625/- IS CONFIRMED . AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN AP PEAL BEFORE US. 15. BEFORE US, LD.AR REITERATED THE SUBMISSIONS MADE BEFO RE LOWER AUTHORITIES AND FURTHER SUBMITTED THAT NO DISALLOWANCE ON ACCOUNT OF EXCESSIVE INTEREST WAS MADE IN EARLIER YEARS EVEN THOUG H THE SUBSTANTIAL DEPOSITS WERE GIVEN BY ASSESSEE IN EARLIER YEA RS. IN SUPPORT OF THE AFORESAID CONTENTION THAT NO DISALLOWANCE WAS MADE IN EARLIER YEARS, HE PLACED ON RECORD THE COPY OF THE ASSESSMENT S FRAMED U/S 143(3) OF THE ACT FOR AY 2006-07 AND AY 2007-08. HE FUR THER SUBMITTED THAT THE ASSESSEE HAS SUFFICIENT INTEREST FREE D EPOSITS IN THE FORM OF SHARE CAPITAL AND FREE RESERVES WHICH ARE FAR IN EX CESS OF THE AMOUNT OF DEPOSITS GIVEN BY THE ASSESSEE. HE POINTED TO THE COPY OF THE BALANCE SHEET PLACED AT PAGE 71 OF THE PAPER BOOK AND POINTED TO THE FIGURE OF SHAREHOLDERS FUND OF RS.965.10 CRORES. HE TH EREFORE SUBMITTED THAT WHEN THE SHAREHOLDERS FUNDS ARE FAR IN EX CESS OF THE DEPOSITS GIVEN, THEN IT IS PRESUMED THAT THE AMOUNT OF DE POSITS GIVEN ARE OUT OF INTEREST FREE FUNDS AND FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANC E UTILITIES AND POWER LTD., REPORTED IN 313 ITR 340 (BOM). HE ALSO PLACED 14 RELIANCE ON THE DECISION OF PUNE TRIBUNAL IN THE CASE OF TRIN ITY INDIA LIMITED IN ITA NO.666/PN/2012 ORDER DT.28.08.2013. HE THER EFORE SUBMITTED THAT NO DISALLOWANCE OF INTEREST ON NOTIONAL BASIS IS CALLED FOR IN THE PRESENT CASE AND THEREFORE THE ADDITION MADE BY THE AO BE DELETED. LD DR ON THE OTHER HAND TOOK US THROUGH THE ORDER OF AO AND LD.CIT(A) AND SUPPORTED THE ORDER OF LOWER AUTHORITIES. 16. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT GROUNDS IS WITH RESP ECT TO DISALLOWANCE OF INTEREST BY HOLDING THAT THE DEPOSITS PAID T O THE RESPECTIVE PARTIES ARE EXCESSIVE. IT IS AN UNDISPUTED FACT THAT IN MO ST OF THE CASES, THE DEPOSITS HAVE BEEN GIVEN BY THE ASSESSE E TO THE VARIOUS PARTIES IN EARLIER YEARS AND DURING THE YEAR UNDER CONSID ERATION TO SOME OF THE PARTIES, FURTHER DEPOSITS HAVE BEEN GIVEN. IT IS ALSO AN UNDISPUTED FACT THAT IN THE ASSESSMENTS FRAMED U/S 143(3 ) OF THE ACT FOR AY 2006-07 AND 2007-08, NO DISALLOWANCE OF THE INTERE ST ON ACCOUNT OF THE DEPOSITS BEING EXCESSIVE AND UNREASONABLE WAS MADE BY THE AO. THE TOTAL DEPOSIT GIVEN BY THE ASSESSEE UPT O THE YEAR, AS PER THE DETAILS AS GIVEN ON PAGE 134 OF THE PAPER BOOK IS RS.13.26 CRORE AS AGAINST WHICH THE AVAILABILITY OF INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES AND SURPLUS AS AT THE END OF THE FINANCIAL YEAR 31 ST MARCH 2008 IS IN EXCESS OF RS.965 CRORES INDICATING THAT THE AVAILABILITY OF INTEREST FREE FUNDS WITH THE ASSESSE E TO BE FAR IN EXCESS OF THE AMOUNTS GIVEN ON DEPOSITS. WHEN THE AVAILAB ILITY OF INTEREST FREE FUNDS ARE FAR IN EXCESS OF THE AMOUNTS GIVEN AS DEPOSITS, THEN AS PER THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES (SUPRA), A PRESUMPTION ARISES THAT THE DEP OSITS ARE 15 OUT OF INTEREST FREE FUNDS AND NO INTEREST BEARING FUNDS A RE UTILIZED FOR MAKING THE DEPOSITS. THE RATIO OF THE AFORESAID DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES (SUPRA) HA S BEEN FOLLOWED BY THE VARIOUS BENCHES OF PUNE TRIBUNAL. BEFORE US, REVENUE HAS NOT BROUGHT ON RECORD ANY CONTRARY BINDING DECISIO N IN ITS SUPPORT. WE THEREFORE FOLLOWING THE RATIO OF THE AFORESAID DE CISION RENDERED IN THE CASE OF RELIANCE UTILITIES (SUPRA) HOLD THAT IN THE PRESENT CASE, NO DISALLOWANCE OF INTEREST IS CALLED FOR. THUS, THE GROUNDS OF THE ASSESSEE ARE ALLOWED. 17. GROUND NO.5 IS WITH RESPECT TO DISALLOWANCE OF DEPRECIA TION ON NON COMPETE FEES. 17.1. ASSESSEE HAD CLAIMED DEPRECIATION OF RS.18,28,125/- ON WDV OF NON COMPETE FEE OF RS.73,12,500/- TREATING THE SAME AS IN TANGIBLE ASSET. LD.CIT(A) IN PARA 4.12.1 OF THE ORDER HAS NOTED TH AT NO VIEW ON DEPRECIATION WAS TAKEN BY THE AO IN THE ASSESSMENT ORD ER. LD.CIT(A), RELYING ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF SHARP BUSINESS SYSTEM VS. CIT (ITA NO.492 OF 2012 AND C. M. APPEAL NO.14836 OF 2012) HELD THAT NON-COMPETE FEE IS NEITHER RE VENUE EXPENDITURE NOR INTANGIBLE ASSET AND THEREFORE DOES NOT QUALIFY FOR DEPRECIATION U/S 32(1)(II) OF THE ACT. HE ACCORDINGLY FOLLOWIN G THE AFORESAID DECISION OF THE HONBLE DELHI HIGH COURT DENIED THE CLAIM OF DEPRECIATION. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US. 16 18. BEFORE US, LD.A.R. REITERATED THE SUBMISSIONS MADE BEFO RE AO AND LD.CIT(A). HE FURTHER SUBMITTED THAT ASSESSEE HAD CLA IMED DEDUCTION OF RS.1,30,00,000/- ON ACCOUNT OF NON COMPETE FEE IN A.Y. 2006-07. THE CLAIM WAS DENIED BY AO. WHEN THE MATTER WAS CARRIED BEFORE LD.CIT(A), HE CONFIRMED THE ORDER OF AO BUT HOWEVER GRANTED DEPRECIATION BY TREATING IT AS CAPITAL ASSET AND INCLUDED IT BLOCK OF ASSETS AND ALLOWED DEPRECIATION AT 25%. ACCORDINGLY DEPR ECIATION OF RS.32,50,000/- WAS ALLOWED TO THE ASSESSEE IN A.Y. 2006-07 BY LD.CIT(A). HE SUBMITTED THAT IN SUBSEQUENT YEAR I.E., A.Y.2007 -08 AO HAD ALLOWED DEPRECIATION OF RS.24,37,500/- ON WDV OF RS.97,50,0 00/- BUT IN APPELLATE PROCEEDINGS, LD.CIT(A) BY FOLLOWING THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF SHARP BUSINESS SYS TEMS (SUPRA) HELD THAT NON-COMPETE FEES WAS NEITHER REVENUE E XPENDITURE NOR AN INTANGIBLE ASSET AND THEREFORE NOT ENTITLED TO DEP RECIATION U/S 32(1)(III) OF THE ACT. LD.CIT(A) THEREFORE AFTER GIVING ENHANCEMEN T NOTICE, DENIED THE CLAIM OF DEPRECIATION OF RS.24,37,500/-. AG GRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE CARRIED THE MATTER B EFORE ITAT. THE CO-ORDINATE BENCH OF THE TRIBUNAL VIDE ORDER DATED 09.06.2 017, DECIDED THE ISSUE IN FAVOUR OF ASSESSEE. HE THEREFORE SU BMITTED THAT ONCE AN ASSET HAS ENTERED IN A BLOCK OF ASSET, IT LOSES IT IDENTITY AND HAS TAKEN THE SHAPE OF DEPRECIABLE ASSET AND THEREAFTER THE BLOCK OF ASSET CANNOT BE DISTURBED AND THE CLAIM OF DEPRECIATION ON THE WDV CANNOT BE DENIED. HE THEREFORE RELYING ON THE DECISION O F CO-ORDINATE BENCH OF THE TRIBUNAL, SUBMITTED THAT THE CLAIM OF ASSESSEE OF ALLOWING DEPRECIATION BE ALLOWED. LD.D.R. ON THE OTHER HAND, SUPPORT ED THE ORDER OF LOWER AUTHORITIES. 17 19. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT GROUND IS WITH RESP ECT TO ALLOWING DEPRECIATION ON INTANGIBLE ASSETS. IT IS AN UNDISPUTED FACT THAT THE CLAIM OF DEPRECIATION WAS ALLOWED TO THE ASSESSEE IN A.Y. 2 006-07 AND THE INTANGIBLE ASSETS HAD ENTERED INTO BLOCK OF ASSETS IN A.Y. 2006-07. IN A.Y. 2007-08, THE CLAIM OF DEPRECIATION WAS DISALLOWED BY LD.CIT(A). WHEN THE MATTER WAS CARRIED BEFORE THE CO-ORDINATE BEN CH OF THE TRIBUNAL, THE ISSUE WAS DECIDED IN FAVOUR OF ASSESSEE BY TH E CO- ORDINATE BENCH OF THE TRIBUNAL BY OBSERVING AS UNDER : 36. SECOND ISSUE IS RELATING TO WITHDRAWAL OF DEPR ECIATION ON NON- COMPETE FEE. LD. COUNSEL FOR THE ASSESSEE NARRATED THE FACTS THAT THE ASSESSEE ALLOWED THE PAYMENT OF NON-COMPETE FEE (IN SHORT NCF) AS ALLOWABLE REVENUE EXPENDITURE. IN THE EARLIER ASSE SSMENT YEAR, 2006- 07, THE REVENUE AUTHORITIES ALLOWED THE SAME AND TR EATED THE SAME AS CAPITAL ASSET, HOWEVER, THEY INCLUDED THE SAME IN THE BLOCK OF ASSETS AND ALLOWED DEPRECIATION. THUS THIS PART OF NON-CO MPETE HAS TAKEN A SHAPE OF DEPRECIABLE ASSET WHICH IS DULY INCLUDED I N THE BLOCK OF ASSETS IN THE CURRENT ASSESSMENT YEAR 2007-08. HOWEVER, D URING THE ASSESSMENT PROCEEDINGS IN THE YEAR UNDER CONSIDERAT ION, THE ASSESSING AUTHORITIES CONTINUED TO ALLOW THE DEPRECIATION IN THE LINES OF DECISION IN ASSESSMENT YEAR 2006-07. HOWEVER, DURING THE FIRST APPELLATE PROCEEDINGS BY WHICH TIME THE DELHI HIGH COURT HAS PASSED JUDGMENT IN THE CASE OF SHARP BUSINESS SYSTEM VS. CIT VIDE ITA NO.492/2012 & C.M. APPL. NO.14836/2012 ORDER DATED 05-11-2012 HAS INTER ALIA HELD THAT NON-COMPETE FEE IS NEITHER A REVENUE EXPENDITU RE NOR AN INTANGIBLE ASSET. THEREFORE, IT DOES NOT QUALIFY FOR DEPRECIA TION U/S.32(1)(II) OF THE ACT. HENCE, AFTER GIVING ENHANCEMENT NOTICE THE CI T(A) ENHANCED THE ASSESSED INCOME BY RS.24,37,500/- AND DENIED THE CL AIM OF DEPRECIATION ON THE SAID NON-COMPETE FEE. AS PER T HE DISCUSSION GIVEN IN PARA 5.3 AND THE REASONS GIVEN THEREIN THE CIT(A ) HELD THAT THE NON- COMPETE FEE IS NEITHER ALLOWABLE EXPENDITURE NOR DE PRECIABLE ASSET ELIGIBLE FOR DEPRECIATION CLAIMED U/S.32(1)(II) OF THE ACT. 37. AGGRIEVED WITH THE SAME, THE ASSESSEE IS IN APP EAL WITH THE SAID ISSUE BEFORE US. 38. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT THERE ARE DIVERGENT DECISIONS FROM 2 DIFFERENT HIGH COURT S, I.E. DELHI AND MADRAS HIGH COURTS ON THE SAME ISSUE. CONSIDERING THE JUDGMENT IN THE CASE OF CIT VS. M/S. VEGETABLE PRODUCTS 88 ITR 192 (SC) THE JUDGMENT WHICH IS IN FAVOUR OF THE ASSESSEE IS REQU IRED TO BE CONSIDERED, I.E., THE JUDGMENT IN THE CASE OF MADRA S HIGH COURT IN THE FACTS OF THE PRESENT CASE. FURTHER, ELABORATING TH E FACTS, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS IS A CASE OF SECON D YEAR OF CLAIM OF DEPRECIATION. AO IS NOT ALLOWED TO TAKE OUT THIS D EPRECIABLE ASSET OUT OF THE BLOCK OF ASSETS CREATED IN THE ASSESSMENT YEAR 2006-07, RELYING ON 18 THE PUNE BENCH DECISION IN THE CASE OF FINOLEX CABL ES LIMITED VS. DCIT AND VICE VERSA IN ITA NOS. 360 AND 564 & 565/PN/201 4 ORDER DATED 31-08-2015 LD. COUNSEL FOR THE ASSESSEE SUBMITTED T HAT REVENUE AUTHORITIES ARE PREVENTED RESTRUCTURING THE PLOT FO R ANY REASONS OF DECISIONS. BRINGING OUR ATTENTION TO CONTENTS OF P ARA NOS. 11 TO 13 THE ASSESSEE IS FOUND ELIGIBLE FOR CLAIM OF DEPRECIATIO N ON THE WRITTEN DOWN VALUE OF THE INTANGIBLE ASSET IN THE IMPUGNED ASSES SMENT YEAR. FOR THE SAKE OF COMPLETENESS OF THIS ORDER, WE PROCEED TO E XTRACT THE SAID PARAGRAPHS AS UNDER : 11. WE HAVE HEARD THE SUBMISSIONS OF RIVAL SIDES AT LENGTH AND HAVE EXAMINED THE ORDERS OF THE AUTHORITIES BEL OW. AS FAR AS THE FACTS ARE CONCERNED, THE REVENUE HAS NOT RAISED ANY DISPUTE. THE ONLY POINT OF CONTENTION IS; WHETHER THE ASSES SEE IS ELIGIBLE TO CLAIM DEPRECIATION ON THE PAYMENT OF LUMPSUM AMO UNT PAID BY ASSESSEE TO SHIN ETSU FOR THE SUPPLY OF RAW MATE RIAL (PREFORM) AT THE REDUCED RATE? IT IS AN UNDISPUTED F ACT THAT THE LUMPSUM PAYMENT OF 285 MILLION JAPANESE YEN W AS MADE BY THE ASSESSEE IN THE PERIOD RELEVANT TO A SSESSMENT YEAR 2004-05 AND THE ASSESSEE HAD CAPITALIZED THE SAME IN THE VERY FIRST YEAR ITSELF. THE ASSESSEE HAD CL AIMED DEPRECIATION ON THE SAID AMOUNT IN THE ASSESSMEN T YEARS 2004- 05, 2005-06 AND 2006-07. THE REVENUE HAD ACCEPTE D THE CLAIM OF ASSESSEE IN EACH OF THE SAID ASSESSM ENT YEARS. IN THE IMPUGNED ASSESSMENT YEAR, THE ASSESSING OF FICER DISALLOWED THE CLAIM ON THE GROUND THAT NO CAPITAL ASSET WAS ACQUIRED BY THE ASSESSEE. NO INTANGIBLE ASSET, LIK E TECHNICAL KNOWHOW, HAD COME INTO EXISTENCE, THEREFORE, T HE ASSESSEE CANNOT CLAIM DEPRECIATION ON THE PAYMENTS MADE TO S HIN ETSU. IN THE FIRST APPEAL, THE COMMISSIONER OF INCOME TAX (APPEALS) REJECTED THE CLAIM OF ASSESSEE WITH FOLLOWING OB SERVATIONS: 14. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AS WELL AS REPLY OF THE APPELLANT, IN THIS CAS E, UNDISPUTED FACT REMAINS THAT THE AMOUNT IN QUESTION HAS BEEN PAID IN RESPECT OF RAW MATERIAL WHICH COULD NOT BE OBTAINED BY THE APPELLANT ON ACCOUNT OF DELAY IN SETUP OF P LANT. THE APPELLANT DUE TO CRASH IN PRICES AND IN ORDER TO KEEP THE BUSINESS RELATIONSHIP AGREED TO PAY ON ACCOUNT OF UNSUPPLIED QUANTITY OF PREFORMS AND CLAIMS THE SAME TO BE INTANGIBLE ASSET BY WAY OF COMMERCIAL RIGHT. THIS CLAIM OF THE APPELLAN T IS WITHOUT ANY MERIT AS NO RIGHT HAS BEEN ACQUIRED BY THE APPELLANT AND THE SAME WAS PAID MERELY TO KEEP THE PURCHASE AGREEMENT ALIVE AND REDUCE THE PRICES OF PREFORMS. THEREFORE, I DO NOT FIND ANY INFIRMITY IN THE ORDER OF ASSESSING OFFICER, THE CLAIM OF THE APPELLANT THAT THE AMOUNT WAS PART OF WDV BROUGHT DOWN FROM EARLIER YEARS IS ALSO UNSUSTAINABLE AS WRONGL Y BROUGHT DOWN WDV CANNOT BE ACCEPTED AS SACROSANCT. THEREFORE, I DO NOT FIND ANY MERIT IN T HE GROUND TAKEN AND THEREFORE, THE SAME IS DISMISSED. 19 12. THE ASSESSEE IN THE PERIOD RELEVANT TO ASSESS MENT YEAR 2004-05 HAD CAPITALIZED THE AMOUNT OF 285 MIL LION JAPANESE YEN AND HAD CLAIMED DEPRECIATION THEREON YEAR AFTE R YEAR. THIS FACT IS EVIDENT FROM THE BALANCE SHEET FILED BY THE ASSESSEE FOR THE FINANCIAL YEAR ENDING ON 31-03-2004, 31-03-200 5 AND 31- 03-2006. ONCE, IT HAS BECOME THE PART OF BLO CK OF ASSET ON WHICH THE DEPRECIATION HAS BEEN ALLOWED FOR THE THR EE ASSESSMENT YEARS, THE DEPRECIATION CANNOT BE DENIED IN THE SUBSEQUENT ASSESSMENT YEARS ON THE WRITTEN DO WN VALUE. THE ASSET CANNOT BE TAKEN OUT OF BLOCK OF ASSETS. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE CASE OF KODAK POLYCHROME GRAPHICS (I) (P) LTD. VS. ACIT (SUPRA). THE RELEVA NT EXTRACT OF THE FINDINGS OF THE TRIBUNAL ON THE ISSUE OF DISALLOWAN CE OF CLAIM OF DEPRECIATION IS AS UNDER: 20. WE HAVE CONSIDERED THE RIVAL CONTENTIONS , PERUSED THE RELEVANT FINDINGS OF THE ASSESSING OF FICER AS WELL AS THE LEARNED COMMISSIONER (APPEALS) AND THE MATERIAL PLACED ON RECORD. IT HAS NOT BEEN DISPUTED BEFORE US THAT THE ASSETS ON WHICH THE DEPRECIATION HAS BEEN CLAIMED IN THIS YEAR ARE FORMING PART OF BLOCK OF ASSETS AND THE WRITTEN DOWN VALUE ON SUCH ASSETS IS COMING FROM THE EARLIER YEARS. ON SUCH ASSET S, DEPRECIATION HAS BEEN ALLOWED BY THE DEPARTME NT IN THE ASSESSMENT YEAR 2000-01 AND 2002- 03 AND ALSO IN THE SUBSEQUENT ASSESSMENT YEARS. ONCE THE DEPRECIATION HAS BEEN ALLOWED ON 'BLOCK OF ASSETS', THE SAME CANNOT BE DISALLOWED IN THIS YEAR ON THE WRITT EN DOWN VALUE. THUS, WITHOUT GOING INTO THE ASPECTS AS TO WHETHER MARKETING DATA BASE AND FACILITY FOR USE OF NETWORK AND HUMAN RESOURCES ARE IN THE NATUR E OF BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE IN THE NATURE OF INTANGIBLE ASSETS WITHIN THE MEANING OF SECTION 32(1)(II), WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND DIRECT THE ASSESSING OFFICER TO ALLOW THE DEPRECIAT ION ON SUCH ASSETS AS IT HAS BEEN ALLOWED IN THE EARL IER YEAR AND IS PART OF 'BLOCK OF ASSETS'. CONSEQUENTL Y, GROUND NO.4, RAISED BY THE ASSESSEE IS TREATED AS A LLOWED. 13. THUS, IN VIEW OF THE FACTS OF THE CASE, WE AR E OF THE CONSIDERED VIEW THAT THE ASSESSEE IS ELIGIBLE TO CL AIM DEPRECIATION ON THE WRITTEN DOWN VALUE OF INTANGIBLE ASSETS IN T HE IMPUGNED ASSESSMENT YEAR. THE APPEAL OF THE ASSESSEE IS AL LOWED, ACCORDINGLY. 39. FROM THE ABOVE CONTENTS, IT IS SETTLED PRINCIPL E THAT THE CLAIM OF DEPRECIATION NEEDS TO BE ALLOWED ON THE WRITTEN DOW N VALUE OF THE INTANGIBLE ASSET. SEGREGATION OF A DEPRECIABLE ASS ET OUT OF BLOCK OF ASSETS IS NOT PERMITTED ARTIFICIALLY. DENIAL OF AS SET SPECIFIC DEPRECIATION OUT OF SUCH BLOCK OF ASSETS IS ALSO NOT PERMITTED. THE SAID JUDGMENT OF DELHI HIGH COURT IN THE CASE OF SHARP BUSINESS SYST EM (SUPRA) WAS DECIDED PRIOR TO THE DECISION OF THE TRIBUNAL. THE REFORE, WE ARE OF THE VIEW THAT GROUND NO.2 SHOULD BE ALLOWED IN FAVOUR O F THE ASSESSEE IN VIEW OF JUDGMENT OF APEX COURT IN THE CASE OF VEGET ABLE PRODUCTS (SUPRA). 20 20. BEFORE US, NO CHANGE IN FACTS HAS BE POINTED OUT BY REVENUE. WE THEREFORE FOLLOWING THE ORDER OF CO-ORDINATE BENCH OF T HE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2007-08 HOLD THAT ASSESS EE IS ELIGIBLE FOR DEPRECIATION. THEREFORE, THE GROUND IS ALLOWED. 21. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALL OWED. ORDER PRONOUNCED ON 28 TH DAY OF FEBRUARY, 2018. SD/- SD/- ( SUSHMA CHOWLA ) ( ANIL CHATURVEDI ) ! / JUDICIAL MEMBER '! / ACCOUNTANT MEMBER PUNE; DATED : 28 TH FEBRUARY, 2018. YAMINI #$%&'('% / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. 4. 5 6. CIT(A)-II, NASHIK. CIT-II, NASHIK. '#$ %%&',) &', / DR, ITAT, B PUNE; $+,-/ GUARD FILE. / BY ORDER // TRUE COPY // ./0%1&2 / SR. PRIVATE SECRETARY ) &', / ITAT, PUNE.