The DCIT, Circle-1, Baroda V. Grand Polycoats Co.Pvt. Ltd., Baroda

ITA 1108/AHD/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4386 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 23-08-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 09-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P L KUREEL
• Keywords: Commercial expediency; Revenue expenditure
• Section: 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH BEFORE: SRI D.K TYAGI, JUDICIAL MEMBER AND SHRI T.R. MEENA, ACCOUNTANT MEM BER THE DCIT, CIR. 1(1) BARODA (APPELLANT) VS GRAND POLYCOATS CO. PVT. LIMITED, 204, SIDDHARTH COMPLEX, R.C. DUTT RD, ALKAPURI, BARODA PAN: AAACG 8439 N (RESPONDENT) REVENUE BY: SRI P.L. KUREEL, SR.D.R. ASSESSEE BY: SRI VARTIK CHOKSHI, A.R . DATE OF HEARING : 23-08-2013 DATE OF PRONOUNCEMENT : 06-09-20 13 / ORDER PER : D.K. TYAGI, JUDICIAL MEMBER:- THIS IS THE REVENUES APPEAL AGAINST THE ORDER OF LD. CIT(A)-I BARODA DATED 09-12-2009. 2. THE REVENUE HAS TAKEN FOLLOWING TWO GROUNDS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.CIT(APPEALS) ERRED IN DELETING THE ADDITION OF RS.2,70,000/- ITA NO. 1108/AHD/2010 ASSESSMENT YEAR 2006-07 I.T.A NO. 1108/AHD/2010 A.Y. 2006-07 PAGE NO DCIT VS. GRAND POLYCOATS PVT. LTD 2 MADE U/S. 40A(2) ON ACCOUNT OF DISALLOWANCE OF INTE REST PAID ON LOAN FROM DIRECTORS OF THE COMPANY AT A MORE THAN THE PR EVAILING MARKET RATE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.CIT( APPEALS) ERRED IN DELETING THE ADDITION OF RS. 12,37,964/- MADE U/S. 37(L) OF THE ACT ON ACCOUNT OF DISALLOWAN CE OF SILVER JUBILEE EXPENSES. FIRSTLY, THE ASSESSEE COMPANY WAS INCORPO RATED IN 1988, AND HENCE, HAS NOT COMPLETED 25 YEARS SINCE ITS INC ORPORATION, AND SECONDLY; THE EXPENDITURE WAS NOT REQUIRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE, AND HENCE, NOT ALLOWABLE EXPENDITURE U/S.37(L) OF THE ACT. 3. GROUND NO. 1 RELATES TO DISALLOWANCE OF RS. 2,70 ,000/- U/S. 40A(2) OF THE ACT. THE ASSESSEE HAS TAKEN LOANS FROM DIRECTO RS AND PAID INTEREST TO THEM @ 14% PER ANNUM. THE AO NOTED THAT DURING FIN ANCIAL YEAR THE MARKET RATE OF INTEREST 13%. CONSIDERING THE RATE OF 13% TO BE MARKET RATE, ASSESSING OFFICER HELD THAT INTEREST PAID OVER AND ABOVE 13% WAS UNREASONABLE AND EXCESS. INTEREST @ 13% ON THE UNS ECURED LOANS TO THE DIRECTORS WAS WORKED OUT TO RS. 35,10,000/- AGAINST WHICH THE ASSESSEE HAD CLAIMED RS. 37,80,000/- ACCORDINGLY DIFFERENTIAL IN TEREST OF RS. 2,70,000/- WAS DISALLOWED. LD. CIT(A) FOLLOWING ITS EARLIER O RDER FOR ASSESSMENT YEAR 2004-05 IN ASSESSEES CASE ON IDENTICAL ISSUE DELET ED THIS DISALLOWANCE. SINCE THE ORDER OF LD. CIT(A) FOR ASSESSMENT YEAR 2 004-05 HAS BEEN UPHELD BY US IN ITA NO. 1107/AHD/2010 DATED 31-07-2013, WE FEEL NO NEED TO INTERFERE WITH THE ORDER PASSED BY HIM AND THE SAME IS HEREBY UPHELD. THIS GROUND OF THE REVENUE IS DISMISSED. 4. SECOND GROUND RELATES TO DISALLOWANCE OF RS. 12, 37,964/- BEING SILVER JUBILEE EXPENSES. THE AO DURING THE ASSESSMENT PRO CEEDINGS FOUND THAT THE I.T.A NO. 1108/AHD/2010 A.Y. 2006-07 PAGE NO DCIT VS. GRAND POLYCOATS PVT. LTD 3 COMPANY WAS INCORPORATED ON 10-02-1988, HENCE THE C OMPANY HAD NOT COMPLETED 25 YEARS OF EXISTENCE. HE THEREFORE ASKE D THE ASSESSEE TO JUSTIFY HIS CLAIM OF EXPENSES INCURRED ON SILVER JUBILEE. THE ASSESSEES EXPLANATION WAS THAT EARLIER THE COMPANY WAS BEING RUN AS PROPR IETARY CONCERN OF THE PROMOTER SHRI BHARAT P. CHAOKSHI UNDER THE NAME AND STYLE OF POLYCOATS INDIA. SUBSEQUENTLY IN 1988 THE PROPRIETARY CONCER N WAS CONVERTED INTO PRIVATE LIMITED COMPANY. THE 25 YEARS SILVER JUB ILEE CELEBRATION WERE WITH RESPECT TO THE DATE OF COMMENCEMENT OF BUSINESS OF THE ORIGINAL FIRM I.E. POLYCOATS INDIA. HOWEVER, THIS EXPLANATION WAS NOT ACCEPTABLE TO THE AO AND HE WAS OF THE VIEW THAT EXPENDITURE WAS INCURRE D FOR NON BUSINESS PURPOSES AND THE SAME WAS DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE. BEFORE LD. CIT(A), IT WAS SUBMITTED BY A SSESSEE THAT AS PART OF THE SILVER JUBILEE ALL THE DISTRIBUTORS AND BUSINESS AS SOCIATES, PRESENT AND POTENTIALLY FUTURE CLIENTS WERE INVITED FOR THE FUN CTION HELD AT BARODA. AS PART OF THE CELEBRATIONS, EMINENT MUSICIANS AND SIN GERS HAD BEEN ENGAGED FOR THE GALA MUSICAL EVENING. SINCE EXPENDITURE WAS IN CURRED FOR PROMOTING CLOSER RELATIONS FOR ITS BUSINESS ASSOCIATES, THE S AME WAS ALLOWABLE AS REVENUE EXPENDITURE. IN SUPPORT OF ITS CLAIM THAT THE EXPENDITURE WAS ACTUALLY INCURRED, COPIES OF THE INVITATION CARDS E TC OF THE MUSICAL EVENING WERE PLACED ON RECORD. LD. CIT(A) ACCEPTING THE SU BMISSION OF THE ASSESSEE AND HOLDING THAT EXPENSES WERE INCURRED BY THE ASSE SSEE OUT OF COMMERCIAL EXPEDIENCY, DELETED THE ADDITION. 5. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD, WE FIND THAT DETAILS OF EXPENSES AMOUNTING TO RS. 12,37,964/- WE RE NOT ON RECORD EITHER BEFORE ASSESSING OFFICER WHEN HE TREATED THESE EXPE NSES BEING INCURRED FOR I.T.A NO. 1108/AHD/2010 A.Y. 2006-07 PAGE NO DCIT VS. GRAND POLYCOATS PVT. LTD 4 NON BUSINESS PURPOSES OR BEFORE LD. CIT(A) WHEN HE HELD THAT THESE WERE INCURRED OUT OF COMMERCIAL EXPEDIENCY. IT WAS ONLY DURING THE APPELLATE PROCEEDINGS BEFORE US THAT THE DETAILS OF THESE EXP ENSES WERE CALLED FOR AND WERE SUBMITTED BY THE ASSESSEE. WE ARE THEREFORE O F THE VIEW THAT MATTER NEEDS FRESH ADJUDICATION AT THE END OF ASSESSING OF FICER IN ACCORDANCE WITH LAW AFTER NECESSARY VERIFICATION OF THESE DETAILS O F EXPENSES. THIS GROUND OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. 6. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOWE D FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE AT CAPTION PAGE SD/- SD/- (T.R. MEENA) ( D.K. TYAGI) ACCOUNTANT MEMBER J UDICIAL MEMBER AHMEDABAD : DATED 06/09/2013 AK / COPY OF ORDER FORWARDED TO:- 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,