Niya Finstock Pvt.Ltd., Ahmedabad V. The CIT-A'bad-III, Ahmedabad

ITA 1149/AHD/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0465 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-03-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 11-01-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 15-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D P GUPTA
• Keywords: Opportunity of being heard; Diversion of income; Bad and doubtful debts; Difference of opinion; Change of opinion
• Section: 37; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH AHMADABAD BEFORE SHRI MUKUL KR. SHRAWAT , JUDICIAL MEMBER AND SHRI T.R. MEENA, ACCOUNTANT MEMBER ITA NO. 1149/AHD/2010 ASSESSMENT YEAR :2005-2006 & ITA NO. 1207/AHD/2012 ASSESSMENT YEAR :2005-2006 NIYA FINSTOCK PVT. LTD. NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD COMMISSIONER OF INCOME- TAX, AHMADABAD-III, AHMADABAD. V/S . V/S. COMMISSIONER OF INCOME- TAX, AHMADABAD-III, AHMADABAD. NIYA FINSTOCK PVT. LTD. NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD PAN NO. AA A CN 5205D (APPELLANT) .. (RESPONDENT) BY REVENUE SHRI D. P. GUPTA, CIT D.R. /BY ASSESSEE SHRI S. N. SOPARKAR, SR. ADV. WITH SHRI HIMANSHU SHAH /DATE OF HEARING 11.01.2013 /DATE OF PRONOUNCEMENT 08.03.2013 O R D E R PER : T.R.MEENA, ACCOUNTANT MEMBER THESE ARE PARALLEL APPEALS FILED BY THE ASSESSEE AN D REVENUE IN ITA NOS. 1149/AHD/10 & 1207/AHD/12 RESPECTIVELY WHICH H AVE EMANATED FROM THE ORDERS OF CIT, AHMEDABAD-III, AHMEDABAD, DATED 26.0 3.2010 AND CIT(A)-XI, AHMADABAD, DATED 23.03.2012 RESPECTIVELY FOR ASSESS MENT YEAR 2005-2006. BOTH APPEALS WERE HEARD TOGETHER AND ARE BEING DISP OSED OF BY WAY OF THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. THE SOLE GROUND OF APPEAL OF THE ITA NO. 1149/AHD/2010 & 1207/AHD/2012 A.Y. 05-06 PAGE 2 APPELLANT IS AGAINST PASSING THE ORDER U/S.263 OF T HE IT ACT WHEREAS REVENUES APPEAL IS AGAINST DELETING THE DISALLOWAN CE OF INTEREST OF RS.1,10,40,296/- U/S. 36(1)(III) OF THE IT ACT. 2. THE ORIGINAL ASSESSMENT WAS COMPLETED BY THE A.O . IN THIS CASE ON 17.12.2007 U/S.143(3) OF THE IT ACT. THE LD. CIT-I II, AHMADABAD FOUND THE ABOVE ORDER ERRONEOUS AND PREJUDICIAL TO THE INTERE ST OF REVENUE FOR FOLLOWING REASONS: I. BAD DEBT OF RS.44,48,514/- WRONGLY ALLOWED. II. LONG TERM CAPITAL LOSS OF RS.9,88,076/- WAS ALL OWED, EVEN THERE WAS NO TRANSFER OF SHARES. III. THE APPELLANT HAD NOT CHARGED INTEREST ON FUND S GIVEN TO M/S. SUNRISE FIN CAP LTD. OF RS. 1.5 CRORE AND SATELLITE MANAGEM ENT SERVICE PVT. LTD. OF RS. 6,99,25,355/-. THE CIT GAVE REASONABLE OPPORTUNITY OF BEING HEARD TO THE APPELLANT WHICH WAS RESPONDED BY THE APPELLANT. AFTER CONSIDERING THE ASSESSEES REPLY, THE LD. CIT HELD THAT A.O. HAD FAILED TO MAKE PROPER IN QUIRY. THE APPELLANT IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND NO IN TEREST HAD BEEN CHARGED ON THE FUND GIVEN TO ABOVE COMPANIES. THE APPELLAN T HAD WRITTEN OFF INTEREST ON THE BASIS OF AGREEMENT MADE DURING THE SUBSEQUEN T YEAR. FURTHER, NOTIONAL LOSS ON SALE OF SHARES HAS BEEN CLAIMED BY THE APPELLANT AT RS.9,88,076/-. ON THIS ISSUE, LD. CIT FOUND THE A. OS. ORDER DATED 17.12.2007 THE ERRONEOUS AND PREJUDICIAL PURCHASER TO INTEREST OF REVENUE. THE A.O. RAISED QUERY ON BAD DEBT VIDE LETTER DATED 30.11.20 07 WHICH WAS REPLIED BY ITA NO. 1149/AHD/2010 & 1207/AHD/2012 A.Y. 05-06 PAGE 3 THE ASSESSEE ON 06.12.2007 WHICH HAS BEEN CONSIDERE D BY THE A.O. AND NO ADDITION HAD BEEN MADE BY THE LD. A.O. IN INCOME U/ S.143(3) VIDE HIS ORDER DATED 17.12.2007. THUS, ON THIS ISSUE, THE LD. CIT ORDER IS TANTAMOUNT TO CHANGE OF OPINION. ON THIS ISSUE I.E. LONG TERM CA PITAL LOSS AND DISALLOWANCE OF INTEREST IN CASE OF SATELLITE MANAG EMENT SERVICE PVT. LTD. OF RS. 6,99,25,355/-, THE LD. A.O. HAD NOT MADE ASSESS MENT WITHOUT PROPER INQUIRY, THE ORDER IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE, AS HELD IN CASE OF MABABAR INDUSTRIES CO. LTD. VS. CIT 343 ITR 83 (SC) . THUS, WE HOLD THIS REVISIONARY ORDER PASSED U/S. 263 IS V ALID. ITA NO.1207/AHD/2012 (REVENUES APPEAL) 4. THE LD. A.O. PASSED THE ORDER U/S.143(3) R.W.S. 263 FOR A.Y. 05-06 ON 15.12.2010 AD HE MADE ADDITION IS AS UNDER: I. DISALLOWANCE OF BAD DEBTS RS.44,48,514/- II. DISALLOWANCE OF INTEREST EXPENSES RS.1,10,40,2 96/- III. DISALLOWANCE OF LONG TERM CAPITAL LOSS. RS.9,8 8,076/- 3. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE AS SESSEE CARRIED THE MATTER BEFORE THE CIT(A) WHO HAD DELETED ALL THE AD DITIONS AND DECIDED THE APPEAL IN FAVOUR OF THE APPELLANT. WHEN THE MATTER IS CONCLUDED AT THE LEVEL OF A.O. AS WELL AS AT THE LEVEL OF CIT(A), WE ARE NOT COMMENTING ON THE ORDER PASSED U/S.263 BY THE CIT. WE ARE DECIDING THE REV ENUES APPEAL ON ONE ISSUE RAISED BY THE DEPARTMENT. THE A.O. OBSERVED THAT THE APPELLANT HAD ADVANCED MONEY TO TWO COMPANIES (I) M/S. SUNRISE FI NCAP LTD. RS.1.5 CRORE AND (II) M/S. SATELLITE MANAGEMENT SERVICE PVT. LTD . RS. 6.99 CRORE. THE ITA NO. 1149/AHD/2010 & 1207/AHD/2012 A.Y. 05-06 PAGE 4 APPELLANT DEBITED A EXPENDITURE OF RS. 1,38,99,020 FOR PAYMENT OF INTEREST AND CREDITED INTEREST OF RS.67,88,399/-. IT WAS FOUND THAT THE ASSESSEE COMPANY HAD NOT CHARGED ANY INTEREST ON THE INTER-CORPORATE DEPOSITS OF RS. 1.5 CRORE AND RS.6,99,25,355/- WITH SUNRISE FINCAP LTD. AND S ATELLITE MANAGEMENT SERVICES PVT. LTD. RESPECTIVELY. THE APPELLANT PAI D INTEREST RANGING FROM 12% TO 15% BORROWINGS TO OTHER CONCERNS. THEREFORE, RE LINQUISHMENT OF INTEREST CHARGEABLE ON ICD OF THE ABOVE TWO COMPANIES AMOUNT ED TO DIVERSION OF INTEREST BEARING FUNDS TO NON-INTEREST BEARING FUND S. THE APPELLANT SUBMITTED BEFORE THE A.O. THAT INTEREST HAD ALREADY BEEN CHAR GED IN EARLIER YEARS HAS NOT CHARGEABLE AND WRITTEN OFF AS BAD DEBTS, THERE WAS NO QUESTION OF CHARGING INTEREST DURING THE YEAR. THE FINANCIAL POSITION O F SUNRISE FINCAP PVT. LTD. BECAME WORSE AND PRECARIOUS, THEREFORE, IT WAS NOT ABLE TO PAY THE PRINCIPAL AMOUNT AND INTEREST. SIMILARLY, SATELLITE MANAGEME NT SERVICES LTD. WAS ALSO NOT IN A POSITION TO REPAY PRINCIPAL AMOUNT AND INT EREST AS IT BECAME A SICK COMPANY. THE ASSESSEE HAD FURTHER CONTENDED THAT E XPENDITURE COULDNT BE DISALLOWED MERELY BECAUSE CERTAIN LOSS BECAME BAD A ND DOUBTFUL. THE ASSESSEES REPLY WAS NOT FOUND CONVINCING TO THE A. O. AND HELD THAT RELINQUISHMENT OF INTEREST CHARGEABLE ICD OF ABOVE THAT COMPANIES MENTIONED TO DIVERSION OF INCOME BEARING FUND TO NON-INTEREST BEARING FUND. THUS, HE CHARGED INTEREST @ 13% ON THE TWO DEPOSITS TOTALLY TO RS.8,49,25,355/- WHICH WAS WORKED OUT AT RS.1,10,40,296/- AND ADDITION WAS MADE BY THE A.O. IN THE INCOME OF THE ASSESSEE. ITA NO. 1149/AHD/2010 & 1207/AHD/2012 A.Y. 05-06 PAGE 5 5. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE AS SESSEE CARRIED THE MATTER BEFORE THE CIT(A), WHO HAD ALLOWED THE APPEA L IN FAVOUR OF THE APPELLANT, AFTER CONSIDERING THE REPLY OF THE APPEL LANT AND HELD AS UNDER: 4.3 I HAVE CONSIDERED RIVAL SUBMISSIONS. I HAVE A LSO PERUSED VARIOUS EVIDENCES FURNISHED BY THE LD. A.R. IT I S EEN THAT APPELLANT HAS ADVANCED FOLLOWING LOANS DURING THE NORMAL COUR SE OF BUSINESS. SUNRISE FINCAP PVT. LTD. 1,50,00,000/- SATELLITE MANAGEMENT SERVICES PVT. LTD. 6,99,25,35 5/- SINCE THESE CONCERNS WERE FINANCIALLY WEAK AND THEY WERE NOT IN A POSITION TO REPAY INTEREST, ACCORDINGLY, APPELLANT HAD NOT CHARGED INTEREST ON THESE ADVANCES. THE A.O. WAS OF THE VI EW THAT APPELLANT IS MAINTAINING ITS ACCOUNTS ON MERCANTILE SYSTEM AN D ACCORDINGLY IT WAS REQUIRED TO CHARGE INTEREST ON THESE ADVANCES. IN VIEW OF THIS, THE A.O. HELD THAT THIS AMOUNTED TO DIVERGENT OF IN TEREST BEARING FUNDS TO NON INTEREST BEARING FUNDS. HE WAS OF THE OPINION THAT INTEREST @ 13% ON THE ABOVE DEPOSITS OF RS.1,10,40, 296/- (8,49,25,355 X .13) SHOULD BE DISALLOWED. 4.4 IT IS SEEN THAT THE A.O. HAS DISALLOWED INTERES T CLAIMED U/S.36(1)(III) OF I.T. ACT SINCE ENTIRE DISPUTE IS IN RESPECT OF INTEREST EXPENSES CLAIMED U/S.36(1)(III) OF I.T. ACT. IT WI LL BE PERTINENT TO DISCUS PROVISIONS OF THIS SECTION. IT IS SETTLED P ROPOSITION OF LAW THAT TO CLAIM ALLOWABLE INTEREST U/S.36(1)(III), FOLLOWI NG CONDITIONS SHOULD BE FULFILLED. (I) THE ASSESSED MUST HAVE BORROWED MONEY (II) THE INTEREST SHOULD HAVE BEEN PAYABLE (III) BORROWING SHOULD BE MADE FOR THE PURPOSE OF BUSINESS. 4.5 PERUSAL OF THE ASSESSMENT ORDER REVEALS THAT TH E A.O. HAS NOT ANALYZED THESE CONDITIONS AND THE A.O. HAD MISERABL Y FAILED TO BRING ANY MATERIAL ON RECORD TO PROVE THAT ABOVE SAID CON DITIONS WERE NOT ITA NO. 1149/AHD/2010 & 1207/AHD/2012 A.Y. 05-06 PAGE 6 FULFILLED. IT IS MENTIONED BY THE A.O. IN THE ASSE SSMENT ORDER THAT RELINQUISHMENT OF INTEREST ON ICD AMOUNTED TO DIVER SION OF INTEREST BEARING FUNDS TO SISTER CONCERN AS NON-INTEREST BEA RING FUNDS. THE METHODOLOGY APPLIED BY THE ASSESSING OFFICER DOES N OT WARRANT DISALLOWANCE OF INTEREST U/S.36(1)(III) OF THE IT A CT. SINCE CAPITAL HAS BEEN BORROWED FOR THE PURPOSE OF BUSINESS AND THE I NTEREST EXPENSES. WERE DULY CLAIMED, ACCORDINGLY I AM OF T HE CONSIDERED VIEW THAT INTEREST OF RS.1,10,40,26/- SHOULD NOT BE DISALLOWED. THIS GROUND OF APPEAL IS ALLOWED. 6. NOW THE REVENUE IS BEFORE US. LD. CIT D.R. RELI ED UPON THE ORDER OF THE A.O. AND CONTENDED THAT IT WAS A DIVERSION OF I NCOME BY THE APPELLANT TO THE SISTER CONCERN. HE RELIED IN CASE OF K. SOMASUNDARAM & BROTHERS VS. CIT, (1999) 238 ITR 939 (MAD), WHEREIN IDENTICAL ISSUE HAS BEEN DECIDED BY THE HONBLE MADRAS HIGH COURT AGAINST THE ASSESSEE. HE FURTHER ARGUED THAT NO EVIDENCE HAD BEEN GIVEN BEFORE THE A.O. THAT BOTH T HE COMPANIES FINANCIAL POSITION WERE BAD AND ONE OF THE COMPANY BECAME SIC K FOR WHICH HE RELIED IN CASE OF CIT VS. MOTOR GENERAL FINANCE LTD., [2002] 122 TAXM AN 447 (DELHI), WHEREIN IT WAS HELD BY THE HONBLE DELHI HIGH COURT THAT AS THE ASSESSEE COULD NOT PRODUCE ANY DOCUMENT IN THIS REGARD, ADVE RSE INFERENCE IN TERMS OF SECTION 114 OF THE INDIAN EVIDENCE ACT WAS DRAWN TO THE EFFECT THAT THESE DOCUMENT HAD BEEN PRODUCED THE SAME WOULD HAVE GONE AGAINST THE INTEREST OF THE ASSESSEE. THUS, THE TRIBUNAL WAS NOT RIGHT IN DELETING THE ADDITION OF RS.10 LACS MADE ON ACCOUNT OF INTEREST FREE LOAN/ A DVANCE GIVEN BY THE ASSESSEE TO THE SISTER CONCERN. HE FURTHER DRAWN O UT ATTENTION ON PAGE NO.22 OF THE PAPER BOOK AND ARGUED THAT THE ASSESSEE COMP ANY HAD SHARE CAPITAL ITA NO. 1149/AHD/2010 & 1207/AHD/2012 A.Y. 05-06 PAGE 7 ONLY RS.18.25 LACS, ALL FUNDS AVAILABLE WITH IT, AR E FROM LOANS WHICH HAD BEEN MOSTLY GIVEN BY THE APPELLANT IN FORM OF ADVANCES T O THE SISTER CONCERN. THEREFORE, HE REQUESTED TO CONFIRM THE ADDITION MAD E BY THE A.O. 7. AT THE OUTSET, LD. COUNSEL FOR THE APPELLANT CON TENDED THAT BOTH THE COMPANIES FINANCIAL POSITIONS WERE VERY BAD. BECA USE OF THIS, THE APPELLANT AND THESE COMPANIES MADE AN AGREEMENT DATED 11.05.2 005 (PAGE NO.35 TO 38) TO SETTLE THE ACCOUNT. THEY PROMISED TO PAY PR INCIPAL ON THE CONDITION THAT THE INTEREST DURING YEAR IS TO BE WAIVED. ALL THE EVIDENCES FOR BAD FINANCIAL POSITION OF BOTH COMPANIES HAD BEEN GIVEN BEFORE TH E A.O. HE FILED A PAPER BOOK AND CLAIMED THAT THE APPELLANT COMPANY IS ENGA GED IN THE FINANCIAL BUSINESS AND THE FUNDS WERE BORROWED FOR THE PURPOS E OF BUSINESS MERELY BECAUSE CERTAIN LOANS WERE GIVEN AS ICD AND INTERES T COULD NOT BE EARNED THE EXPENSES CANNOT BE DISALLOWED. THE BORROWINGS TAKE N WERE PART OF FINANCIAL BUSINESS. THE INTEREST EXPENSES WERE INCURRED WAS ALSO PART OF BUSINESS. THE APPELLANT FURTHER CLAIMED THAT THERE WAS NO REA L INCOME AND RELIED IN CASE OF 225 ITR 746 (SC), 98 ITR 415 (ALL.), 303 ITR 159 (DEL) & 220 ITR 410 (DEL) AND REQUESTED TO CONFIRM THE ORDER OF THE CIT(A). 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE APPELLANT HAD PROVED BEFORE THE A.O. TH AT FINANCIAL POSITION OF BOTH THE SISTER CONCERN TO WHOM ADVANCES WERE GIVEN , FOR WHICH AGREEMENT MADE WITH SUNRISE FINCAP LTD. ON 11.05.2005. AS PE R PAGE NO. 36 OF PAPER BOOK, THE COMPANY HAD NEGATIVE NET WORTH. THE INCO ME OF THE COMPANY WAS REDUCING DAY-BY-DAY AND THE COMPANY HAD NO CONCRETE FUTURE BUSINESS PLAN. ITA NO. 1149/AHD/2010 & 1207/AHD/2012 A.Y. 05-06 PAGE 8 IT WAS AGREED BY THE BOTH THAT THEY ARE READY TO FO R GO INTEREST PORTION, IF PRINCIPAL AMOUNT OF RS.1.5 CRORE IS PAID BY THE COM PANY ON OR BEFORE 15.05.2005. IN CASE OF SATELLITE MANAGEMENT SERVIC ES LTD., THE COMPANY INCURRED LOSSES RS.2.46 CRORE AS ON 31.03.2005 (PAG E NO.78 OF THE PAPER BOOK). ACCORDINGLY, THIS COMPANY WAS NOT IN GOOD P OSITION TO REPAY THE INTEREST OR PRINCIPLE AMOUNT. THE COMPANY BECAME S ICK. THE ASSESSEE BORROWED THE FUND FOR THE BUSINESS PURPOSE AND PAID THE INTEREST ON IT WHICH IS ALLOWABLE U/S. 37 OF THE IT ACT. THE APPELLANT HAD REASON TO NO CHARGE INTEREST FROM TWO COMPANIES. THUS, WE HAVE CONSIDERED VIEW THAT NO INTERFERENCE IS REQUIRED IN THE ORDER OF THE CIT(A), WE DISMISS THE APPEAL OF THE REVENUE. 9. IN THE COMBINED RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED AND REVENUES APPEAL IS DISMISSED. THESE ORDERS PRONOUNCED IN OPEN COURT ON 08.03.2013 SD/- SD/- ( MUKUL KR. SHRAWAT ) (T.R. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- 1. '#$ / APPELLANT 2. &'#$ / RESPONDENT 3. )*)+ ' ', / CONCERNED CIT 4. 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