DCIT CIR 2(2), MUMBAI V. MERCHON TEXTILES INDUSTRIES LTD, MUMBAI

ITA 1180/MUM/2010

• Counselvise Citation: 118019914 RSA 2010
• Duration Of Justice: 1 year(s) 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 23-08-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 12-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P K B MENON
• Keywords: Notional interest; Sham transactions; Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES J : MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI P.M.JAGTAP, ACCOUNTANT MEMBER ITA. NO. 1180 & 1181/MUM/2010 ASSESSMENT YEAR 2005-2006 & 2006-2007 DCIT, CIRCLE 2 (2) MUMBAI 20. VS. M/S. MARCHON TEXTILES INDUSTRIES LTD. MUMBAI-400059 PAN AABCM9475F (APPELLANT) (RESPONDENT) FOR APPELLANT : SHRI P.K.B. MENON (D.R.) FOR ASSESSEE : SHRI VIJAY MEHTA, (A.R.) DATE OF HEARING : 23-08-2011 DATE OF PRONOUNCEMENT : 23-08-2011 ORDER PER D. MANMOHAN, V.P. 1. THESE APPEALS BY THE REVENUE PERTAIN TO THE ASS ESSMENT YEARS 2005-2006 AND 2006-2007. SINCE THE ISSUE INVO LVED IN BOTH THE APPEALS IS IDENTICAL WE PROCEED TO DISPOSE OF THE A PPEALS BY A COMMON ORDER FOR THE SAKE OF CONVENIENCE. GROUNDS RAISED B Y THE REVENUE ARE EXTRACTED FOR IMMEDIATE REFERENCE. 1. THE ORDER OF THE CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2(A). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW CIT(A) ERRED IN DELETING THE DISALLOWANCE OF IN TEREST EXPENSES OF RS.1,22,86,301/- (RS.1,01,59,364/- FOR A.Y. 2006-2007) WHICH WAS CHARGED @ 12% ON ADVANCES PAID TO COMMERCIAL CONSTRUCTION CORPN, SATGURU HOME S & DOSTI CORPN. WITHOUT ANY COMMERCIAL AND ANY BUSINESS EXPEDIENCY. 2(B) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT THE ALLEGED TRADE ADVANCES PAID BY THE ASSESSEE DID NOT RESULT IN SUBSEQUENT ACQUIRING OF THE FLATS FROM TH E PERSONS TO WHOM ADVANCES WERE PAID AND THESE WERE SHAM TRANSACTIONS. 2 3. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE DECISION OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED . 2. ADMITTEDLY, ASSESSING OFFICER SOUGHT TO BRING T O TAX NOTIONAL INTEREST INCOME ON THE GROUND THAT THE ASS ESSEE OUGHT TO HAVE CHARGED INTEREST AT 12% ON THE LOANS ADVANCED TO VARIOUS PARTIES. THE CASE OF THE ASSESSEE WAS THAT THE AMOU NTS WERE ADVANCED IN THE COURSE OF ITS BUSINESS AND WHILE RETURNING S UCH AMOUNTS SOME OF THEM HAVE COMPENSATED THE ASSESSEE IN MONETARY T ERMS, THOUGH NOT UNDER THE NOMENCLATURE INTEREST. THE ASSESSING OFFICER, HOWEVER, PROCEEDED ON THE FOOTING THAT THE ASSESSEE HAS NO J USTIFIABLE REASON TO ADVANCE AMOUNTS TO CERTAIN PARTIES WITHOUT PROPER A GREEMENTS AND THAT TOO WITHOUT CHARGING ANY INTEREST AND THUS CON CLUDED THAT THE ENTIRE ARRANGEMENT APPEARED TO BE SHAM. UNDER THE C IRCUMSTANCES, HE CALCULATED THE INTEREST RECEIVABLE ON INTEREST F REE ADVANCE AND LOANS AND SINCE SUCH INTEREST EXCEEDS THE INTEREST PAID BY THE ASSESSEE, THE ENTIRE INTEREST DEBITED TO THE P & L ACCOUNT AMOUNTING TO RS.1,22,86,301/- (FOR A.Y. 2005-2006) AND RS.1,0 1,59,364 (FOR A.Y. 2006-2007) WAS DISALLOWED BY THE ASSESSING OFFICER BY HOLDING THAT THE INTEREST PAID BY THE ASSESSEE IS NOT CONNECTED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. 3. ON AN APPEAL FILED BY THE ASSESSEE, THE LEARNED CIT(A) OBSERVED THAT THE ASSESSEE HAD JUSTIFIABLE REASONS FOR ADVANCING THE AMOUNTS IN ITS CAPACITY AS A PRUDENT BUSINESSMAN. A T ANY RATE, NOTIONAL INTEREST CANNOT BE ADDED TO THE TAXABLE IN COME. IN FACT, THE ASSESSING OFFICER HAS NOT ADDED ANY NOTIONAL INCOME BUT MERELY SOUGHT TO DISALLOW INTEREST PAID BY THE ASSESSEE PR ESUMABLY ON THE GROUND THAT THE INTEREST BEARING FUNDS WERE NOT UTI LISED FOR BUSINESS PURPOSE. IN PARAS 8.3 AND 8.4 OF THE ORDER FOR A.Y. 2005-2006 THE LEARNED CIT(A) OBSERVED THAT THE INTEREST PAID BY T HE ASSESSEE PERTAINS TO THE AMOUNT OF RS.20 CRORES BORROWED FROM GE CAPI TAL AT AN INTEREST RATE OF 7.5% P.A. THIS AMOUNT WAS DIRECTLY ADVANCED ON THE SAME DATE TO LAKSHDEEP INVESTMENT & FINANCE PVT. LTD. FROM WH OM IT HAD 3 RECEIVED INTEREST @ 10%. THUS, NO PART OF THE BORRO WED FUNDS WERE UTILISED FOR GIVING INTEREST FREE ADVANCES SO AS TO DISALLOW ANY PART OF THE INTEREST PAID BY THE ASSESSEE. HE CATEGORICALLY OBSERVED THAT THE ASSESSING OFFICER FAILED TO DEMONSTRATE THAT THE AS SESSEE HAD USED BORROWED FUNDS FOR GIVING INTEREST FREE ADVANCES. U NDER THE CIRCUMSTANCES, DISALLOWANCE MADE BY THE ASSESSING O FFICER WERE SET ASIDE. 4. THOUGH THE REVENUE STRONGLY RELIED UPON THE REA SONS GIVEN BY THE ASSESSING OFFICER, LEARNED DR WAS UNAB LE TO CONTRADICT THE FINDINGS OF THE LEARNED CIT(A) WITH REGARD TO F ACTUM OF NON- UTILISATION OF THE INTEREST BEARING FUNDS FOR GIVIN G INTEREST FREE ADVANCES. SUCH BEING THE CASE, WE ARE OF THE VIEW T HAT THE REVENUE HAS NOT MADE OUT A CASE FOR DISALLOWING THE CLAIM O F INTEREST PAID BY THE ASSESSEE. WE, THEREFORE, AFFIRM THE ORDERS PASS ED BY THE LEARNED CIT(A) AND DISMISS THE APPEALS FILED BY THE REVENUE . ORDER PRONOUNCED IN THE OPEN COURT ON 23-8-2011. SD/- SD/- (P.M.JAGTAP) (D.MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT MUMBAI, DATE 23 RD AUGUST, 2011. VBP/- COPY TO 1. DCIT, CIRCLE 2 (2), MUMBAI. 2. M/S. MARCHON TEXTILES INDUSTRIES LTD., MARCHON H OUSE, J.B. NAGAR, ANDHERI-KURLA ROAD, ANDHERI (E), MUMBAI-400059 PAN AABCM9475F 3. CIT(A)-5, MUMBAI 4. CIT-2, MUMBAI 5. DR J BENCH 6. GUARD FILE (TRUE COPY) BY ORDER ASST. REGISTRAR, ITAT, MUMBAI BENCHES MUMBAI.