M/s Jagannath Alloys Limited, Ludhiana V. ACIT, Ludhiana

ITA 1144/CHANDI/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9170 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 7 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 15-06-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 24-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Keywords: Reasonable cause; Scheme of amalgamation; Commercial expediency; Condonation of delay

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO. 1144/CHD/2014 (ASSESSMENT YEAR : 2011-12) M/S JAGANATH ALLOYS LIMITED, VS. THE A.C.I.T., VILLAGE KANECH, OPP. GURUDWARA CIRCLE-V, ATTARSAR SAHIB, G.T. ROAD, LUDHIANA. SAHNEWAL, LUDHIANA. PAN: AABCJ2960Q (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUDHIR SEHGAL RESPONDENT BY : SHRI MANJIT SINGH, DR DATE OF HEARING : 08.08.2016 DATE OF PRONOUNCEMENT : 11.08.2016 O R D E R PER ANNAPURNA GUPTA, A.M. : THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-II, LUDHIANA DATED 24.9.2014 FOR ASSESSME NT YEAR 2011-12. 2. AT THE OUTSET IT MAY BE STATED THAT THE APPEAL HAD BEEN DISMISSED FOR NON-PROSECUTION VIDE ORDER O F THE I.T.A.T. DATED 15.6.2015, BUT ON A MISCELLANEOUS APPLICATION FILED BY THE ASSESSEE, IT WAS RECALLED VIDE 2 ORDER DATED 29.4.2016. IN PURSUANCE TO THE SAME, T HE PRESENT APPEAL WAS HEARD BY THE BENCH. 3. WE FIND THAT THE PRESENT APPEAL WAS FILED LATE BY 26 DAYS. AN APPLICATION FOR CONDONATION OF DELAY W AS FILED BEFORE US STATING THE REASON FOR THE DELAY BEING TH E CLOSURE OF THE UNIT AND DECLARATION OF THE BANK ACC OUNT OF THE ASSESSEE AS NPA, WHICH MATTER WAS BEING PURSUED BEFORE THE DRI, CHANDIGARH. THE LEARNED D.R. OPPOS ED THE APPLICATION FILED. WE FIND THAT THE ASSESSEE H AD ADDUCED REASONABLE CAUSE FOR DELAY AND MOREOVER SIN CE THE DELAY IS ONLY OF 26 DAYS, WE CONDONE THE SAME A ND PROCEED TO ADJUDICATE THE APPEAL. 4. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS : 1. THAT THE WORTHY COMMISSIONER OF INCOME TAX (APP EALS) - II, LUDHIANA HAS ERRED IN CONFIRMING THE ADDITION OF RS.48,31,677/- (RUPEES FORTY EIGHT THOUSAND THIRTY ONE THOUSAND SIX HUNDRED & SEVENTY SEVEN ONLY) IN RESPECT OF DISALLOWANCE OF INTEREST U/S 36(1)(III) OF THE INCOME TAX ACT,1961 AGAINST THE PRINCIPLE LAID DOWN BY HON'BLE INCOME TAX APPELLANT TRIBUNAL, CHANDIGARH BENCH, CHANDIGARH. 2. THAT THE WORTHY COMMISSIONER OF INCOME TAX (APPE ALS) - II, LUDHIANA HAS ERRED IN MISINTERPRETING THE PROVI SIONS OF SECTION 36 (1) (III) OF THE INCOME TAX ACT, 1961 B Y CONFIRMING THE DISALLOWANCE OUT OF THE OWNED FUNDS DULY PROVED AND ADMITTED BY THE LD. ASST. COMMISSIONER OF INCOME TAX (APPEALS) -II, CIRCLE - V, RISHI NAGAR, LUDHIANA. 3 3. THAT THE LOANS & ADVANCES WERE GIVEN INTEREST FRE E OUT OF THE OWNED FUNDS OF TINE MERGED ENTITY, THE MERGER OF WHICH WAS APPROVED BY HON'BLE PUNJAB & HARYANA HIGH COURT VIDE ITS ORDER DATED 06.02.2009. 4. THAT THE WORTHY COMMISSIONER OF INCOME TAX (APPE ALS) - II, LUDHIANA HAS ERRED IN MISINTERPRETING THE JUDGM ENT OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE O F M/S ABHISHEK INDUSTRIES LTD. AS WELL AS OTHER COURTS & THE HON'BLE INCOME TAX APPELLANT TRIBUNAL, CHANDIGARH, BENCH CHANDIGARH THAT THE OWNED FUNDS O F THE MERGER ENTITY WERE POOLED WITH THE BORROWER FUN DS IN THE AMALGAMATED ENTITY. 5. THAT THE WORTHY COMMISSIONER OF INCOME TAX (APPE ALS) - II, LUDHIANA HAS ERRED IN MISINTERPRETING ADVANCES / LOANS/DEBTORS SHOWN IN THE BOOKS OF ACCOUNTS OF APPELLANT PERTAINING TO EARLIER YEARS, WHICH WERE OUT OF THE CAPITAL OF M/S TITAN COMFINE LTD. AND THE LD. ASSESSING OFFICER AND WORTHY COMMISSIONER OF INCOME TAX(APPEALS)-II, LUDHIANA HAS NOT COME OUT WITH ANY JUSTIFICATION OR DOCUMENTARY EVIDENCE THAT THE LOAN S & ADVANCES / DEBTOR WERE GIVEN OUT OF THE POOLED FUNDS OR OUT OF BORROWED FUNDS. 6. THAT THE LD. ASSESSING OFFICER AS WELL AS WORTHY COMMISSIONER OF INCOME TAX (APPEALS) -II, LUDHIANA IGNORED THE JUDGMENT OF VARIOUS COURTS & THE HON'BL E INCOME TAX APPELLANT TRIBUNAL, CHANDIGARH DIRECTLY APPLICABLE TO THE COMPANY, BUT WRONGLY APPLIED THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF M/S ABHISHEK INDUSTRIES LTD, WHICH IS NOT APPLICABLE IN THE APPELLANTS CASE. 7. THAT THE LD. ASSESSING OFFICER AS WELL AS WORTHY COMMISSIONER OF INCOME TAX (APPEALS) - II, LUDHIANA HAS FAILED TO PROVE ANY NEXUS BETWEEN THE BORROWERED FUNDS 8T ADVANCES MADE TO VARIOUS PARTIES 4 BECAUSE OF THE REASON THAT THE WHOLE OF THE ADVANCE S WERE MADE OUT OF THE OWNED FUNDS OF THE AMALGAMATEE COMPANY DULY ACCEPTED BY HON'BLE PUNJAB & HARYANA HIGH COURT WHILE APPROVING / SANCTIONING OF AMALGAMATION. 8. THAT THE LD. WORTHY COMMISSIONER OF INCOME TAX (APPEALS)-II, LUDHIANA HAS ERRED IN NOT DECIDING TH E QUESTIONS RAISED IN GROUNDS OF APPEAL AT SR. # (VII), READ AS UNDER: 'THAT THE LD. ASSESSING OFFICER HAS ERRED IN DISALLOWANCE RS.48,31,677/- U/S 36(1)(III) AGAINST HIS OWN JUDGMENT /ORDER THAT THE INTEREST ON THE AMOUNT ADVANCED WHICH HAS STOOD DEBITED FOR THE ENTIRE FINANCIAL YEAR NEEDS TO BE CAPITALIZED.' 9. THAT THE WORTHY COMMISSIONER OF INCOME TAX (APPE ALS) - II, LUDHIANA HAS ERRED IN HOLDING THAT THE AGREEMENT BETWEEN THE PARTIES IN GIVING LOANS & ADVANCES WITHOUT CONSIDERATION I.E. INTEREST IS V OID CONTACT & IS NOT LEGALLY ENFORCEABLE. ONCE THE LOANS & ADVANCES HAVE BEEN ACCEPTED BY HON'BLE PUNJAB & HARYANA HIGH COURT WHILE APPROVING / SANCTIONING THE SCHEME OF AMALGAMATION, THE JUDGMENT PASSED BY THE WORTHY COMMISSIONER OF INCOME TAX (APPEALS) - II, LUDHIANA IS BEYOND HIS JURISDICTION & DIRECTLY INTERFERING THE JURISDICTIONAL HIGH COURT, WHICH MAY BE VIEWED SERIOUSLY. PARTICULARLY KEEPING IN VIE W THAT HE HAS NO JURISDICTION TO DECIDE ON LEGALITY ASPECT OF AN AGREEMENT UNDER THE CONTRACT ACT, 1872 AND ALSO ITS VALIDITY. 10. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS ) -II, LUDHIANA HAS NOT GIVEN ANY OPPORTUNITY / DIRECTED TO PLACE ON RECORD, THE COPY OF ANY AGREEMENT, WHICH THOUGH OTHERWISE WAS ALSO NOT WITHIN HIS JURISDICTION , 5 ONCE THE AMOUNT OF LOANS & ADVANCES ACCEPTED & APPROVED BY HON'BLE PUNJAB & HARYANA HIGH COURT AND ADMITTING THE SAID AMOUNT HAS BEEN GIVEN MUCH PRIOR TO THE FY UNDER CONSIDERATION. 11. THAT THE CHARGING OF INTEREST AND LEVYING OF PEN ALTY IS TOTALLY UNJUSTIFIED & LEGALLY UNTENABLE AND NOT CONSEQUENTIAL IN NATURE. 5. THE SOLE GRIEVANCE OF THE ASSESSEE IN THE PRESE NT APPEAL IS AGAINST THE ACTION OF THE LEARNED CIT (AP PEALS) IN UPHOLDING THE DISALLOWANCE OF INTEREST UNDER SEC TION 36(1)(III) OF THE INCOME TAX ACT, 1961 (IN SHORT T HE ACT) AMOUNTING TO RS.48,31,677/- MADE BY THE ASSESSING OFFICER. 6. BRIEF FACTS RELATING TO THE ISSUE ARE THAT RETU RN DECLARING INCOME OF RS.89,39,740/- WAS FILED BY THE ASSESSEE. THE ASSESSEE IS IN THE BUSINESS OF TRADI NG OF VARIOUS KINDS OF IRON AND STEEL ITEMS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NO TED THAT THE ASSESSEE HAD SHOWN MANY FINANCE COMPANIES AS SUNDRY DEBTORS IN THE BALANCE SHEET. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN THE NATURE OF BUSINESS WITH THESE COMPANIES AND TO PRODUCE THE CO PIES OF LEDGER ACCOUNTS. THE ASSESSING OFFICER NOTED TH AT THERE WERE DEBIT BALANCES OUTSTANDING IN THESE ACCOUNTS S INCE 2008-09 WITHOUT ANY INTEREST HAVING BEEN CHARGED AN D WITHOUT THERE BEING ANY BUSINESS TRANSACTION. THE ASSESSING OFFICER WAS OF THE VIEW THAT THESE ADVANC ES WERE IN THE NATURE OF INTEREST FREE ADVANCES. THE ASSES SING 6 OFFICER ASKED THE ASSESSEE TO EXPLAIN THE BUSINESS EXPEDIENCY OF THESE ADVANCES. THE ASSESSING OFFICE R ALSO ASKED THE ASSESSEE TO EXPLAIN WHY PROPORTIONATE INT EREST UNDER SECTION 36(1)(III) OF THE ACT MAY NOT BE DISA LLOWED. THE ASSESSEE SUBMITTED THAT ADVANCES WERE GIVEN TO THESE COMPANIES BY TITAN COMFINE LTD., WHICH WAS LATER ME RGED WITH THE ASSESSEE COMPANY IN 2009. THE ASSESSEE FU RTHER SUBMITTED THAT THE LOANS RAISED BY THE ASSESSEE COM PANY ON WHICH INTEREST PAID TO THE BANK WAS SOLELY FOR T HE ESTABLISHMENT OF INDUSTRIAL UNIT AND FOR ITS WORKIN G CAPITAL REQUIREMENTS. NO AMOUNT WAS DIVERTED FROM THE LOAN ACCOUNTS AFTER THE MERGER OF TITAN COMFINE LTD . WITH THE ASSESSEES COMPANY FOR ADVANCING ANY AMOUNT TO THESE FINANCE COMPANIES. HENCE, THERE IS NO NEXUS BETWEE N THE LOANS OBTAINED FROM THE BANK AND THE SUNDRY DEBTORS OUTSTANDING IN THE NAME OF THE FINANCE COMPANIES AN D, THEREFORE, NO DISALLOWANCE OF INTEREST TO BE MADE. THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE ASSESS EES CONTENTION. THE ASSESSING OFFICER OBSERVED THAT IT WAS EVIDENT THAT THESE INTEREST FREE ADVANCES WERE GIVE N WITHOUT ANY COMMERCIAL EXPEDIENCY. THE ASSESSING OFFICER FURTHER OBSERVED THAT EVEN THOUGH THESE ADV ANCES WERE MADE BEFORE THE MERGER, NEITHER ANY RECOVERY N OR ANY EFFORT FOR RECOVERY WAS MADE BY THE ASSESSEE AND TH ESE ADVANCES CONTINUED AS SUCH AFTER THE MERGER. THE ASSESSING OFFICER FURTHER POINTED OUT THAT THE ASSE SSEE HAS INCURRED INTEREST EXPENDITURE OF RS.2,18,78,452 /-. THE ASSESSING OFFICER ALSO OBSERVED THAT THE NATURE OF 7 THESE OUTSTANDING AMOUNTS WERE INFACT LOANS AND ADVANCES ALTHOUGH THESE WERE SHOWN UNDER THE HEAD SUNDRY DEBTORS. IN THIS REGARD, THE ASSESSING OFFI CER ALSO REFERRED TO THE BALANCE SHEET OF TITAN COMFINE LTD. WHERE THESE AMOUNTS HAD BEEN SHOWN AS LOANS AND ADVANCES. THE ASSESSING OFFICER ACCORDINGLY, HELD THAT PROPOR TIONATE INTEREST ON THESE INTEREST FREE ADVANCES WAS REQUIR ED TO BE DISALLOWED UNDER SECTION 36(1)(III) OF THE ACT. RE LIANCE WAS PLACED ON THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD., 286 ITR 1. THE ASSESSING OFFICER ACCORDINGLY DISALLOWED AN AMOUNT OF RS.48,31,677/-. 7. THE MATTER WAS CARRIED IN APPEAL BEFORE THE LEARNED CIT (APPEALS), WHO UPHELD THE DISALLOWANCE FOLLOWING THE DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD. (SUP RA). 8. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE DISALLOWANCE WAS UNWARRANTED AND UNCALLED FOR, SINCE THE IMPUGNED LOANS AND ADVANCES HAD BEEN GIVEN BY TITAN COMFINE LTD., THE ENTITY WHICH MERGED WITH THE ASSESSEE, OUT OF ITS OWN INTEREST FREE FUN DS. ALTERNATIVELY, THE LEARNED COUNSEL FOR THE ASSESSEE STATED THAT THE ASSESSEE ALSO HAD ENOUGH INTEREST FREE FUN DS TO MAKE THE ADVANCES AND IN THE ABSENCE OF ANY DIRECT NEXUS ESTABLISHED WITH THE INTEREST BEARING FUNDS, THE PRESUMPTION WAS THAT THE SAME WAS MADE OUT OF INTER EST FREE FUNDS ONLY. RELIANCE WAS PLACED ON A NUMBER O F 8 DECISIONS OF THE JURISDICTIONAL HIGH COURT AND THE I.T.A.T. IN SUPPORT OF THIS PROPOSITION. THE LEARN ED COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE DECIS ION IN THE CASE OF ABHISHEK INDUSTRIES LTD. (SUPRA) HAD B EEN OVERRULED BY SUBSEQUENT DECISION OF THE JURISDICTIO NAL HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES PVT. LTD. VS. CIT, 381 ITR 107 (P&H) AND THE DECISION OF THE HON' BLE APEX COURT IN THE CASE OF HERO CYCLES (P) LTD. VS. CIT, 379 ITR 347 (SC). THE LEARNED COUNSEL FOR THE ASSE SSEE ALSO STATED THAT THERE WAS NO NEXUS BETWEEN THE INT EREST BEARING BORROWED FUNDS OF THE ASSESSEE AND THE ADVA NCES MADE, SINCE THE ENTIRE ADVANCES WERE MADE OUT OF OW N FUNDS OF THE AMALGAMATING COMPANY I.E. TITAN COMFIN E LTD.. 9. THE LEARNED D.R., ON THE OTHER HAND, RELIED UPO N THE ORDER OF THE LEARNED CIT (APPEALS) AND POINTED OUT THAT NO COMMERCIAL EXPEDIENCY FOR MAKING THE ADVANC ES WAS ESTABLISHED BY THE ASSESSEE. 10. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHO RITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECO RD. 11. A PERUSAL OF THE AUDITED BALANCE SHEET OF TITA N COMFINE LTD. ENDED 31.3.2009, PLACED AT PB 73-85 RE FLECTS THE FOLLOWING : 9 A) THE IMPUGNED INTEREST FREE ADVANCES WERE SHOWN EITHER AS LOANS & ADVANCES OR DEBTORS IN THE BALANCE SHEET (PB-73,76). B) OWN INTEREST FREE FUNDS OF TITAN COMFINE LTD. BEING SHARE CAPITAL AND RESERVE AND SURPLUS WERE RS.5,20,69,283/-. C) NO INTEREST BEARING LOANS TAKEN BY TITAN COMFINE LTD.ARE REFLECTED IN THE BALANCE SHEET. D) NO INTEREST EXPENSES ARE DEBITED TO THE PROFIT & LOSS ACCOUNT. 12. THE ONLY CONCLUSION WHICH CAN BE DERIVED FROM THE ABOVE IS THAT THE IMPUGNED ADVANCES WERE MADE B Y TITAN COMFINE LTD., WHICH WAS EITHER OUT OF ITS OWN FUNDS WHICH WERE ENOUGH TO FUND THE ADVANCE OR IF OUT OF INTEREST BEARING FUNDS, THE SAME HAD BEEN PAID OFF AND NO LONGER EXISTED. SUBSEQUENTLY, IN 2009, TITAN COMF INE LTD. MERGED WITH THE ASSESSEE COMPANY. EVEN AFTER MERGER, THE FACT REMAINS AS IT IS AND IT CANNOT BE SAID POST MERGER THAT INTEREST BEARING FUNDS OF THE ASSE SSEE I.E M/S JAGANNATH ALLOYS LTD., WERE USED FOR THE PURPOS E OF MAKING THE ADVANCE. THE INTEREST BEARING FUNDS OF THE ASSESSEE TAKEN PRE OR POST MERGER WITH TITAN COMFIN E LTD., HAVE NO NEXUS AT ALL WITH THE ADVANCES WHICH WERE UNDISPUTEDLY MADE BY TITAN COMFINE LTD. 10 13. FURTHER WE FIND THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE HAD MADE DETAIL ED SUBMISSIONS TO THIS EFFECT THAT THE OUTSTANDING BAL ANCES OF DEBTORS/LOANS & ADVANCES IN THE NAME OF FINANCE COMPANIES WAS A RESULT OF AMALGAMATION/MERGER/ARRANGEMENT AS PER THE PROVISIO NS OF SECTION 391-394 OF THE COMPANIES ACT,1956 DULY SANCTIONED BY THE PUNJAB & HARYANA HIGH COURT VIDE ORDER DATED 06/02/2009.AS A CONSEQUENCE OF THE SCHEME OF MERGER APPROVED ALL THE ASSESTS AND LIABILITIES OF TITAN COMFINE LTD. WHICH CONTAINED THE INVESTMENTS/ADVANCES/DEBTORS WERE MERGED WITH THE ASSESSEE COMPANY. THE ASSETS AS MENTIONED ABOVE WER E OUT OF THE SHARE CAPITAL OF THE COMPANY RAISED THRO UGH PUBLIC ISSUE ,HENCE THERE WAS DIRECT NEXUS BETWEEN THE CAPITAL OF TITAN COMFINE LTD. AND THE IMPUGNED ADVANCES/DEBTORS. ALL EVIDENCES IN SUPPORT OF ITS CONTENTION WAS ALSO PLACED BEFORE THE AO 14. WE FIND THAT THESE FACTS HAVE NOT BEEN CONTROVERTED EITHER BY THE AUTHORITIES BELOW OR BY THE LD. DR DURING THE COURSE OF HEARING BEFORE US. THUS IT IS AN UNDISPUTED FACT THAT THE IMPUGNED OUTSTANDING ADVANCES/DEBTORS ORIGINALLY BELONGED TO TITAN COMFI NE LTD. WHO IN TURN HAD MADE THE SAME OUT OF ITS INTER EST FREE FUNDS BEING SHARE CAPITAL AND THE SAME CAME TO BE REFLECTED IN THE BOOKS OF THE ASSESSEE ON ACCOUNT O F MERGER OF THE TWO COMPANIES. 11 15. IN VIEW OF THE ABOVE , WE UNHESITATINGLY HOLD THAT NO PORTION OF THE INTEREST EXPENDITURE INCURRE D BY THE ASSESSEE, CAN BE ATTRIBUTED TO FUNDS ADVANCED FREE OF INTEREST TO THE IMPUGNED PARTIES AND, THEREFORE, NO DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT IS WARRANTED IN THE CIRCUMSTANCES. 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (SANJAY GARG) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 11 TH AUGUST, 2016 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH