DCIT, Ludhiana V. M/s Octave Apperals, Ludhiana

ITA 1153/CHANDI/2013

• Counselvise Citation: 115321514 RSA 2013
• Duration Of Justice: 1 year(s) 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-09-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 09-12-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D S SINDHU
• Assessee Lawyers: SUDHIR SEHGAL
• Keywords: Capital asset; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO.1153/CHD/2013 (ASSESSMENT YEAR : 2008-09) THE D.C.I.T., VS. M/S OCTAVE APPERALS, CIRCLE III, G.T. ROAD, LUDHIANA. LUDHIANA. PAN: AAAFO3397G (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI D.S.SINDHU, DR RESPONDENT BY : SHRI SUDHIR SEHGAL DATE OF HEARING : 14.09.2015 DATE OF PRONOUNCEMENT : 16.09.2015 O R D E R PER RANO JAIN, A.M . : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-I, LUDHIANA DATED 3.9.2013 FOR ASSESSMENT YEAR 2008-09. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE REA D AS UNDER : 1. THAT THE LD. CIT(A) HAS ERRED IN LAW AND FACTS IN D ELETING THE DISALLOWANCE MADE BY THE A.O. U/S 40A(2)(B)OF THE I NCOME TAX ACT, 1961 WITHOUT APPRECIATING THAT UNSECURED LOANS ARE FREELY 2 AVAILABLE AT INTEREST @12% PER ANNUM. 2. THAT THE LD. CIT(A) HAS ERRED IN LAW AND FACTS IN D ELETING THE DISALLOWANCE OUT OF SHOP EXPENSESE FAILING TO APPRE CIATE THAT THE ITEMS PURCHASED BY THE ASSESSEE-STEREO SYSTEM MANNE QUIN, AIR CONDITIONING ARE ITEMS OF CAPITAL NATURE AND NOT AL LOWABLE AS REVENUE EXPENDITURE. 3. THAT THE LD.CIT(A) ON FACTS AS WELL AS IN LAW, ERRE D IN DELETING THE DISALLOWANCE BY RELYING UPON THE HON'BLE SUPREM E COURT'S JUDGMENT IN THE CASE OF CIT VS MADRAS AUTO SERVICES (P) LTD. (233 ITR 468(SC)) AND A JUDGMENT OF THE HON'BLE BOM BY HIGH COURT, FAILING TO APPRECIATE THAT THE FACTSOF THE P RESENT CASE ARE ENTIRELY DIFFERENT FROM THESE CASES. 4. THAT THE ORDER OF THE LD. CIT(A) BE SET ASIDE AND T HAT OF A.O. BE RESTORED. 5. THAT THE APPELLANT CRAVES LEAVE TO ADD OR AMEND ANY GROUND OF APPEAL BEFORE IT IS FINALLY DISPOSED OFF. 3. THE GROUND NO.1 IS IN RESPECT OF DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 40A(2)(B) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE HAD PAID INTEREST @ 18% ON LOANS RAISED FROM FRIENDS AN D RELATIVES. THE ASSESSING OFFICER WAS OF THE VIEW T HAT THE ASSESSEE HAD BORROWED FUNDS NORMALLY AT THE RATE OF 11% TO 12% FROM THE BANKS AND OTHER FINANCIAL INSTITUTIONS . INVOKING THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT, THE ASSESSING OFFICER CONCLUDED THAT THE INTEREST PAID TO THE SPE CIFIED 3 PERSONS WAS EXCESSIVE TO THE EXTENT OF 6% AND WAS ATTRIBUTABLE TO THE CLOSE RELATIONSHIP WITH THE SAI D PERSONS. THIS WAY, DISALLOWANCE OF RS.7,99,204/- WAS MADE BY THE ASSESSING OFFICER. 5. BEFORE THE LEARNED CIT (APPEALS), THE ASSESSEE MADE ELABORATE SUBMISSIONS AS REGARD TO THE FACT THAT IT HAS BEEN PAYING INTEREST @ 18% FOR THE LAST MANY YEARS AND I T WAS ALSO CONTENDED THAT ASSESSING OFFICER HAS MERELY COMPARE D THE PRESUMPTIVE RATE OF INTEREST CHARGED BY THE BANK @ 12%. THE LEARNED CIT (APPEALS) AGREEING WITH THE CONTENTION OF THE ASSESSEE AND THE VARIOUS JUDICIAL PRONOUNCEMENTS RE LIED UPON BY THE ASSESSEE WHEREIN EVEN THE RATE OF INTEREST O F 24% ON UNSECURED LOANS HAS BEEN HELD TO THE REASONABLE ALL OWED THE APPEALS OF THE ASSESSEE AND DIRECTED THE ASSESSING OFFICER TO DELETE THE ADDITION SO MADE. 6. AGGRIEVED BY THE SAID ORDER OF THE LEARNED CIT (APPEALS), THE REVENUE IS IN APPEAL BEFORE US. DU RING THE COURSE OF HEARING, IT WAS BROUGHT TO OUR NOTICE THA T SINCE THE ASSESSEE HAS BEEN CHARGING THE SAME RATE OF INTERES T FOR SO MANY YEARS, SIMILAR ISSUE CAME IN APPEAL BEFORE THE CHANDIGARH BENCH OF ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-10 IN ITA NO.1064/CHD/2012 DAT ED 25..9.2013. OUR ATTENTION WAS INVITED TO PAGE 6, P ARA 11 OF THE SAID ORDER, WHICH READS AS UNDER : 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. UNDER THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT, IT IS PROVIDED THAT WHERE THE ASSESSEE INCURS ANY EXPENDIT URE IN 4 RESPECT OF WHICH THE PAYMENT HAS BEEN MADE TO SPECIF IED PERSONS UNDER CLAUSE (B) TO SECTION 40A(2) OF THE ACT, THEN WHERE THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPEN DITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE MARK ET VALUE OF THE GOODS, SERVICES OR FACILITIES, THEN SUCH EXCESS E XPENDITURE CANNOT BE ALLOWED AS A DEDUCTION. THE ASSESSEE IN T HE PRESENT SET OF FACTS HAD MADE BORROWINGS FROM ITS FAMILY MEMBERS/RELATIVES OF DIRECTORS, ON WHICH THE RATE OF INTEREST PAID WAS 18% AS IN THE EARLIER YEARS. THE SAID RATE OF I NTEREST HAS BEEN ACCEPTED IN THE EARLIER YEARS. HOWEVER, UNDER T HE PROVISIONS OF THE ACT I.E. SECTION 40A(2)(A) OF THE ACT, IT IS THE MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES, WHICH IS TO B E CONSIDERED WHILE ALLOWING THE CLAIM OF EXPENDITURE IN RESPECT OF THE PAYMENTS BEING MADE TO SPECIFIED PERSONS UNDER CLAU SE (B) OF THE SAID SUB-SECTION. THE RATE OF INTEREST AT 18% IN T HE PRESENT MARKET SCENARIO IS EXCESSIVE AND WE DEEM IT FIT TO REDU CE IT TO 15% PER ANNUM. ACCORDINGLY, ASSESSING OFFICER IS DIR ECTED TO RECOMPUTE THE DISALLOWANCE IN THIS REGARD. THE GROU ND NO. 2 RAISED BY THE REVENUE IS, THUS, PARTLY ALLOWED. 7. SINCE NO NEW FACTS DISTINGUISHING THE CASE WITH THAT OF THE EARLIER YEAR WERE BROUGHT TO OUR NOTICE DURI NG THE COURSE OF HEARING, RESPECTFULLY FOLLOWING THE ORDER OF THE ITAT CHANDIGARH BENCH IN ASSESSEES OWN CASE, FOR EARLIE R YEARS, WE ALSO DEEM IT FIT TO REDUCE THE RATE OF INTEREST TO 15% PER ANNUM. ACCORDINGLY, THE ASSESSING OFFICER IS DIREC TED TO RECOMPUTED THE DISALLOWANCE IN THIS REGARD. 8. THE GROUND NOS.2 AND 3 RELATE TO DISALLOWANCE M ADE BY THE ASSESSING OFFICER ON CERTAIN ITEMS PURCHASED BY THE ASSESSEE HOLDING THE SAME TO BE CAPITAL IN NATURE A S AGAINST THE REVENUE TREATED BY THE ASSESSEE. 5 9. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE INCURRED EXPENSES TO THE TUNE OF RS.1,75,762/- ON P URCHASE OF STEREO SYSTEMS, MANNEQUINS AND AIR CONDITIONER. T HE ASSESSEE HAD CLAIMED THESE EXPENSES IN ITS PROFIT & LOSS ACCOUNT TREATING THE SAME AS REVENUE IN NATURE. TH E ASSESSING OFFICER AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE TREATED THE SAID EXPENSES TO BE IN THE NAT URE OF CAPITAL AND DISALLOWED THE SAME. HOWEVER, THE DEPR ECIATION AT APPLICABLE RATES WERE ALLOWED TO THE ASSESSEE. THI S WAY, AN ADDITION OF RS.1,55,087/- WAS MADE BY THE ASSESSING OFFICER. 10. BEFORE THE LEARNED CIT (APPEALS), IT WAS SUBMI TTED BY THE ASSESSEE THAT THE ASSESSING OFFICER HAS WRON GLY TREATED THE RENOVATION OF SHOP EXPENSES AS CAPITAL IN NATUR E, WHEREAS THE ASSESSEE FIRM IS NOT THE OWNER OF THE SHOP AND HAS TAKEN IT ON RENT. IT WAS ALSO CONTENDED THAT THE EXPENSE S INCURRED ON SHOP RENOVATED BY THE ASSESSEE ARE OF REVENUE IN NATURE. RELIANCE WAS PLACED ON A NUMBER OF JUDICIAL PRONOUN CEMENTS. THE LEARNED CIT (APPEALS) FOUND HIMSELF IN AGREEMEN T WITH THE SUBMISSIONS OF THE ASSESSEE AND HE WAS OF THE VIEW THAT NO CAPITAL ASSET HAS COME INTO EXISTENCE AS THE PREMIS ES IN QUESTION ARE RENTED AND NOT SELF OWNED. FURTHER, IT WAS HELD THAT THE JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE ASSESSEE ARE SQUARELY ON THE ISSUE AND THERE IS NOTHING TO H OLD THAT THE SAID ENDURING BENEFIT WOULD AMOUNT TO CAPITALIZATIO N. THIS WAY, ADDITION MADE BY THE ASSESSING OFFICER WAS DIR ECTED TO BE DELETED. 6 11. NOW, THE DEPARTMENT HAS COME UP IN APPEAL BEFO RE US. THE MAIN CONTENTION OF THE LEARNED D.R. WAS TH AT THESE EXPENSES RELATING TO STEREO SYSTEMS, MANNEQUINS AND AIR CONDITIONER ARE CAPITAL IN NATURE. ASSETS GIVING B ENEFIT OF ENDURING NATURE HAVE BEEN CREATED BY INCURRING THES E EXPENSES. RELIANCE WAS PLACED ON THE ORDER OF THE ITAT MUMBAI BENCH IN THE CASE OF VARDHMAN DEVELOPERS LT D. VS. ITO, MUMBAI IN ITA NO.6820/MUM/2012 DATED 4.2.2015. 12. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE FIRM IS ENGAGED IN THE BUSINESS OF MAN UFACTURING AND TRADING OF GARMENTS AND CLOTHES. IT WAS ALSO SUBMITTED THAT THE ASSESSEE IS HAVING RETAIL SHOW ROOM OF REA DYMADE GARMENTS. THE ASSESSEE IS DEALING IN FASHIONABLE I TEMS AND THE EXPENSES ON PURCHASE OF STEREO SYSTEMS, MANNEQU INS AND AIR CONDITIONER WERE REQUIRED TO RUN THE DAY-TO-DAY BUSINESS OF THE ASSESSEE. IN THIS BACKGROUND, IT WAS SUBMIT TED THAT THESE EXPENSES ARE REVENUE IN NATURE AND NO ASSET O F ENDURING NATURE HAS BEEN CREATED BY THESE EXPENSES. 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIAL AVAILABLE ON RECORD. IT IS AN ADMITTED FA CT THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF FASHIONABLE READYMADE GARMENTS. IT ALSO RUNS RETAIL SHOW ROOM OF THESE GARMENTS. THE FACT THAT THE BUSINESS WAS BEING RUN AT THE REN TAL PREMISES IS IMMATERIAL TO DECIDE THE ISSUE WHETHER THE EXPENDITURE IS CAPITAL OR REVENUE IN NATURE. IN TH E RETAIL 7 BUSINESS OF GARMENTS, IN TODAYS TIME OF TOUGH COMP ETITION, ONE HAS TO MAINTAIN THE SHOWROOM IN QUITE A PRESENT ABLE STATE IN ORDER TO ATTRACT THE CUSTOMERS. KEEPING THE MA NNEQUINS TO DISPLAY THE GARMENTS, STEREO TO PLAY THE MUSIC A ND AIR CONDITIONER TO KEEP THE SHOWROOM COOL ARE THE REQUI REMENTS FOR DAY-TO-DAY RUNNING OF THE BUSINESS. LOOKING T O THE NATURE OF BUSINESS CARRIED ON BY THE ASSESSEE, IT C ANNOT BE SAID THAT THE EXPENDITURE ON THINGS LIKE STEREO SYS TEMS, MANNEQUINS AND AIR CONDITIONER WILL BRING ANY ASSE T OF ANY ENDURING NATURE. ON THIS BASIS ALONE, THESE EXPENS ES CANNOT BE TREATED AS CAPITAL IN NATURE. 14. IN THE RESULT, THE APPEAL OF THE REVENUE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF SEPTEMBER, 2015. SD/- SD/- (BHAVNESH SAINI) (RANO JAIN) JUDICIAL MEMBER ACOUNTANT MEMBER DATED : 16 TH SEPTEMBER, 2015 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH 8