Saroo Rubber and Allied Products ltd., Hyderabad V. DCIT, Hyderabad

ITA 1091/HYD/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66338 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 21-06-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 16-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NIVEDITA BISWAS
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Proportionate interest
• Section: 143(3); 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.1091/HYD/2010 ASSESSMENT YEAR: 2007-08 SAROO RUBBER AND ALLIED PRODUCTS LTD., HYDERABAD. .... APPELLANT PAN:AAECS 7480 F VS. DCIT, CIR-3(1), HYDERABAD. RESPONDENT APPELLANT BY : SHRI K.A. SAI PRASAD RESPONDENT BY : SMT. NIVEDITA BISWAS DATE OF HEARING : 23-08-2012 DATE OF PRONOUNCEMENT : 28-09-2012 ORDER PER SAKTIJIT DEY, J.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 30-6-2010 PASSED IN APPEAL NO.330/DCIT/ CIR- 3(1)/CIT(A)-IV/09-10 AND IT PERTAINS TO THE ASSESSM ENT YEAR 2007-08. 2. GROUND NOS. 1 AND 2 ARE EFFECTIVE GROUNDS. 3. AT THE OUTSET, THE LEARNED AR FOR THE ASSESSEE S UBMITTED THAT HE DOES NOT WANT TO PRESS GROUND NO.2 AND HENC E THE SAID GROUND IS DISMISSED AS NOT PRESSED. 2 ITA NO.1091 OF 2010 SAROO RUBBER AND ALLIED PRODUCTS LTD.. 3. SO FAR AS GROUND NO.1 IS CONCERNED, THE SAME IS EXTRACTED BELOW:- THE LD. CIT (A) IS NOT JUSTIFIED IN CONFIRMING THE ADDITION OF RS.24,89,142 OUT OF RS.62,40,000 REPRESENTING PROPORTIONATE DISALLOWANCE OF INTEREST, IGNORING THE VERY FACT THAT THE INTEREST FREE INVESTMENT OF RS.5.2 CR ORES WAS TOWARDS SHARE APPLICATION MONEY GIVEN TO M/S SARO P OWER & INFRASTRUCTURE L:TD AND IN FACT THE APPELLANT WAS ALLOTTED SHARES TO THE EXTENT OF RS.3.4 CRORES AND FOR THE R EMAINING AMOUNT SHARES ARE YET TO BE ALLOTTED. 4. BRIEFLY THE FACTS ARE THE ASSESSEE A COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF FOOTWEAR INSOLE SHEE T. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSM ENT YEAR UNDER CONSIDERATION DECLARING A TOTAL INCOME OF RS. 21,14,445/- AND NET PROFIT OF RS.26,52,950/- U/S 115JB OF THE A CT. IN THE COURSE OF ASSESSMENT PROCEEDINGS WHILE EXAMINING TH E BALANCE- SHEET OF THE ASSESSEE, THE AO FOUND THAT THE ASSESS EE HAS ADVANCED AN AMOUNT OF RS.5.20 CRORES TO ITS SISTER CONCERN M/S SARO POWER & INFRASTRUCTURE LIMITED TOWARDS SHARE A PPLICATION MONEY , ON WHICH IT HAS NOT EARNED ANY INCOME, WHER EAS THE ASSESSEE WAS PAYING HUGE INTEREST ON BORROWED FUNDS . THE AO THEREFORE ASKED THE ASSESSEE TO EXPLAIN WHY PROPORT IONATE DISALLOWANCE F INTEREST SHOULD NOT BE MADE. THE AS SESSEE EXPLAINED THAT THE FUNDS ADVANCED TO ITS SISTER CON CERN WERE NOT DURING THE YEAR BUT WERE PERTAINING TO THE EARLIER YEAR. THE ASSESSEE FURTHER SUBMITTED THAT THE ADVANCES WERE N OT OUT OF BORROWED FUNDS BUT FOR OWN FUND AVAILABLE WITH THE ASSESSEE. THE AO HOWEVER REJECTING THE CLAIM OF THE ASSESSEE CALCULATED 3 ITA NO.1091 OF 2010 SAROO RUBBER AND ALLIED PRODUCTS LTD.. INTEREST AT THE RATE OF 12% ON RS.5.20 CRORES AND A DDED IT TO THE TOTAL INCOME OF THE ASSESSEE. 5. THE ASSESSEE BEING AGGRIEVED OF THE ADDITION FIL ED AN APPEAL BEFORE THE CIT (A). 6. BEFORE THE CIT (A), IT WAS CONTENDED ON BEHALF THE ASSESSEE THAT THE TOTAL FINANCIAL CHARGES OF RS.24,89,142/- DEBITED TO PROFIT & LOSS A/C COMPRISED OF INTEREST PAID TO SBI, APSFC , BESIDES INTEREST ON CAR LOAN AND BANK COMMISSION. IT WAS FURTHER SUBMITTED THAT THE INVESTMENT IN SAROO POWER & INFR ASTRUCTURE LIMITED MADE FROM TIME TO TIME DURING THE FINANCIAL YEARS 2001- 02, 2003-04 AND AGAIN FOR 2003-04 TOWARDS SHARE A PPLICATION MONEY. THE ASSESSEE WAS ALSO ALLOTTED SHARES TO TH E EXTENT OF RS.3.40 CRORES AND FOR THE BALANCE AMOUNT OF RS.1.8 0 CRORES, SHARES ARE YET TO BE ALLOTTED. IT WAS SUBMITTED BY THE ASSESSEE THAT THE AMOUNT BEING INVESTED SINCE IS FOR SHARE APPLICATION MONEY AND NOT AN UNSECURED LOAN, THEREFORE NO INTER EST WAS CHARGED THEREON. THE ASSESSEE FURTHER SUBMITTED THA T THE INVESTMENTS WERE MADE OUT OF OWN FUNDS AND NOT FROM ANY BORROWINGS. THE CIT (A) THOUGH ACCEPTED THE FACT T HAT THE INVESTMENTS WERE MADE IN THE EARLIER YEAR BUT HE HE LD THAT SUCH INVESTMENT CONTINUED TO EXIST DURING THE YEAR UNDER CONSIDERATION AND THE ASSESSEE ALSO DID NOT EARN ANY INCOME OUT O F SUCH INVESTMENT. THE CIT (A) FURTHER OBSERVED THAT THE ASSESSEE WAS NOT ABLE TO SHOW AS TO WHETHER THE INVESTMENT MADE WAS OUT OF COMMERCIAL OR BUSINESS EXPEDIENCY FOR GAINING BUSIN ESS ADVANTAGE. THE CIT (A) THEREFORE UPHELD THE DISALL OWANCE OF INTEREST PAYMENT. HOWEVER, HE DID NOT APPROVE AN A D HOC DISALLOWANCE OF 12% OF THE TOTAL INVESTMENT OF RS.5 .20 CRORES BUT RESTRICTED TO THE ACTUAL INTEREST PAID OF RS.24,89, 142 WHICH HAS 4 ITA NO.1091 OF 2010 SAROO RUBBER AND ALLIED PRODUCTS LTD.. BEEN DEBITED TO THE PROFIT & LOSS A/C DURING THE RE LEVANT ASSESSMENT YEAR. 7. THE LEARNED AR SUBMITTED BEFORE US THAT THE INVE STMENT OF RS.5.20 CRORES WAS MADE FROM EARLIER ASSESSMENT YEA R I.E., 2003- 04. IN THIS CONTEXT, THE LEARNED AR INVITED OUR AT TENTION TO PAGE- 2 OF THE PAPER BOOK AND CONTENDED THAT THE INVESTM ENT WAS MADE WITH ITS SISTER CONCERN AND THE ASSESSEE HAS B EEN ALLOTTED SHARES OF VALUE OF RS.3.40 CRORES. IT WAS FURTHER C ONTENDED THAT THE INVESTMENTS WERE MADE DURING THE RELEVANT YEARS OUT OF SURPLUS FUNDS AND NOT FROM BORROWED FUNDS. IT WAS CONTENDED THAT THE AO HAS NOT FOUND ANY NEXUS BETWEEN THE BOR ROWED FUNDS AND THE INVESTMENTS MADE WITH THE SISTER CONCERN. T HE LEARNED AR SUBMITTED THAT DURING THE YEAR UNDER DISPUTE, TH ERE HAS BEEN NO QUESTION OF LOANS OR ADVANCES MADE. THEREFORE, NO DISALLOWANCE OF THE INTEREST COULD HAVE BEEN MADE. IT IS FURTHER CONTENTION OF THE LEARNED AR THAT EVEN DURING THE Y EAR THE INVESTMENTS WERE MADE WITH THE SISTER CONCERN, THE AO HAS NOT DISALLOWED PROPORTIONATE INTEREST EVEN THOUGH THE A SSESSMENTS WERE COMPLETED U/S 143(3) OF THE ACT. IN THIS REG ARD, COPIES OF ASSESSMENT ORDERS FOR ASSESSMENT YEARS 2002-03 AND 2003-04 WERE SUBMITTED BEFORE US. THE LEARNED AR SUBMITTED BEFORE US THAT THE AMOUNT HAVING BEEN ADVANCED IN THE PREVIOU S YEAR AND THAT TOO OUT OF HIS OWN SURPLUS FUNDS, NO DISALLOWA NCE COULD HAVE BEEN MADE IN THE YEAR UNDER CONSIDERATION SINCE NO FRESH INVESTMENT HAS BEEN MADE BY THE ASSESSEE. IN THIS REGARD, THE LEARNED AR SUBMITTED THAT NO DISALLOWANCE OF INTERE ST ON ACCOUNT OF INVESTMENT OF RS.5,20 CRORES HAVING BEEN MADE I N THE EARLIER YEAR, THE DISALLOWANCE IN THE YEAR UNDER CONSIDERAT ION SHOULD NOT HAVE BEEN MADE. IN THIS REGARD, THE LEARNED AR REL IED UPON A 5 ITA NO.1091 OF 2010 SAROO RUBBER AND ALLIED PRODUCTS LTD.. DECISION OF ITAT, HYDERABAD BENCH IN ITA NO.1266/HY D/06 DATED 25-1-2012 IN CASE OF GRANDHI SUBBA RAO, GUNTUR VS. DCIT. 8. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE ORDER OF THE CIT (A). 9. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIALS ON RECORD. ADMITTEDLY, THE INVESTMENTS WERE MADE I N THE SISTER CONCERN I.E. M/S SAROO POWER AND INFRASTRUCTURES (P ) LIMITED FOR THE ASSESSMENT YEARS 2001-02, 2002-03 AND 2003-04. THE LEARNED AR FOR THE ASSESSEE HAS ALSO DEMONSTRATED B EFORE US THAT THE INVESTMENTS WERE MADE OUT OF OWN SURPLUS FUND S AND NOT FROM BORROWED FUNDS. FROM THE ORDERS OF THE REVENU E AUTHORITIES, IT IS EVIDENT THAT THEY HAVE NOT ESTABLISHED ANY N EXUS THAT THE INVESTMENTS WERE MADE OUT OF BORROWED FUNDS. IT IS ALSO A VITAL FACT TO NOTE THAT EVEN IN THE ASSESSMENT YEARS WHEN THE INVESTMENTS WERE MADE BY THE ASSESSEE, NO DISALLOWA NCE OF PROPORTIONATE INTEREST WAS MADE EVEN THOUGH ASSESSM ENTS WERE COMPLETED U/S 143(3) OF THE ACT. THEREFORE, CONSID ERING THE FACT THAT THE INVESTMENTS WERE MADE IN THE EARLIER ASSES SMENT YEARS OUT OF OWN FUNDS AND NO FRESH INVESTMENT HAS BEEN M ADE DURING THE ASSESSMENT YEAR UNDER DISPUTE, DISALLOWANCE OF INTEREST COULD NOT HAVE BEEN MADE. THE ORDER PASSED BY THE CO-ORD INATE BENCH OF THE TRIBUNAL IN THE CASE OF GRANDHI SUBBA RAO ( SUPRA) ALSO SUPPORTS THE VIEW. IN THE AFORESAID CASE, THE ITAT WHILE CONSIDERING SIMILAR ISSUE HELD IN THE FOLLOWING MAN NER:- WE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL S AVAILABLE ON RECORD. AS REGARDS INVESTMENT IN SHAR ES IN OTHER COMPANIES AMOUNTING TO RS.3,07,47,737/-, W E 6 ITA NO.1091 OF 2010 SAROO RUBBER AND ALLIED PRODUCTS LTD.. FIND THAT THESE INVESTMENTS HAVE BEEN FROM EARLIER YEARS AND IN PAGE-38 OF THE PAPER BOOK THESE INVESTMENTS HAVE BEEN SHOWN IN THE BOOKS OF ASSESSE E AS ON 31-3-2000. IT IS NOT CLEAR THAT WHETHER THES E INVESTMENTS WERE MADE THAT YEAR OR EARLIER YEARS. THEREFORE, UNLESS IT IS PROVED THAT THESE INVESTMEN TS HAVE BEEN MADE OUT OF BORROWED FUNDS IN THE RESPECTIVE YEARS IN WHICH THE INVESTMENTS HAVE BEEN MADE, NO DISALLOWANCE OF INTEREST CAN BE MADE THIS YEAR ON THE GROUND THAT SUCH INVESTMENTS HAVE BEEN MADE OUT OF BORROWED FUNDS. IF THERE HAVE BEEN NO DISALLOWANCE OF INTEREST ON ACCOUNT OF THESE INVESTMENTS IN THE EARLIER YEARS, IT WOULD BE A STR ONG INDICATION THAT THE AO WAS SATISFIED THAT SUCH INVESTMENTS WERE OUT OF OWN FUNDS AND NOT OUT OF BORROWED FUNDS. FURTHER, WE FIND THAT THE ASSESSING OFFICER HAS NOT FULLY EXAMINED THE ISSUE FROM ALL ASPECTS NOR DID HAVE TH E BENEFIT OF THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY 1999-00. IF THERE HAD BEEN NO DISALLOWANCE ON THIS ACCOUNT IN THE EARLIER YEARS, THERE CANNOT BE FRESH DISALLOWANCE DURING THE CURRENT YEA R, UNLESS FRESH LOANS OR FRESH INVESTMENTS WERE MADE O UT OF BORROWED AMOUNTS DURING THE CURRENT YEAR. HENCE THE AO SHALL ALLOW THE INTEREST WITH RESPECT TO ACCOUNTS WHICH WERE ALREADY THERE FROM EARLIER YEAR S AND RESTRICT THE DISALLOWANCE OF INTEREST ONLY WITH RESPECT TO INVESTMENTS MADE OUT OF BORROWED FUNDS THIS YEAR. 7 ITA NO.1091 OF 2010 SAROO RUBBER AND ALLIED PRODUCTS LTD.. FOLLOWING THE AFORESAID DECISION OF CO-ORDINATE BEN CH, WE HOLD THAT THE DISALLOWANCE OF INTEREST AMOUNTING TO RS.2 4,89,142 CANNOT BE SUSTAINED AND WE DIRECT FOR DELETING THE SAME. THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED AS INDICATED ABOVE ORDER PRONOUNCED IN THE COURT ON 28 -09-2012. SD/- SD /- (CHANDRA POOJARI) ACCOUNTANT MEMBER (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 28 TH SEPT., 2012. COPY TO:- 1) C/O CH. PARTHASARATHY & CO., SOWBHAGYA AVENUE, S TREET NO.1, ASHOKNAGAR, HYDERABAD. 2) THE DCIT, CIR-3(1), HYDERABAD. 3) THE CIT (A)-IV, HYDERABAD 4) THE CIT CONCERNED, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABA D. JMR* 8 ITA NO.1091 OF 2010 SAROO RUBBER AND ALLIED PRODUCTS LTD..